Cyprus stares into the Abyss

The future of Cypriot finances has been thrown into greater doubt than ever, and today hangs precariously in the balance. 

Last week, Cypriot Finance Minister Vassos Shiarly stated publicly that he expected to have concluded bailout talks with the troika of lenders (IMF, ECB and European Commission) within a month, and the expectation was that Cyprus would request from the troika a smaller bailout than had previously been mooted, in order to avoid having to concede a 20 page long list of demands from European financiers. 

Details of the strings to be attached to a bail-out were leaked recently, and included an unpalatable series of measures to raise taxes and slash public spending.  As a consequence, Cyprus instead focused on trying to secure a short-term loan from Russia which it believed would come with fewer overt string attached, but which would be based on a 'political' understanding.

Last year, Russia provided Cyprus with a four and-a-half year loan of EUR2.5 billion (around 14% of the country's gross domestic product) after Cyprus was effectively frozen out of international debt markets, and there is therefore a precedent for the Russians helping out the small Island.  In the current round of negotiations it is understood that a further EUR5 billion of loans had been requested and the noises coming out of Cyprus were fairly optimistic in the past week or so that the loan would go ahead, but now it appears that chances of this are fading.  It seems that the Russians are worried about the ability of the Island to repay a loan which represents such a high proportion of its GDP, and sources involved in the negotiations are expressing serious doubts that the loan will go ahead.  This would leave the Cypriot government, which is believed to have enough cash to last only until November, forced to concede the troika’s demands in order to secure EU funds.

Reports of the EU proposals say that under a full European bailout, the nation's wealthy residents would suffer additional taxes on real estate holdings, accumulated wealth, and income and the Island would also face an increase in VAT and extra duty on cigarettes and alcohol.  These would undoubtedly all be highly unpalatable measures for the Cypriot government, and would be made worse by the fact that at the same time the troika would seek a 15% cut in public sector salaries, an end to the “13^th month” end of year bonus and a raft of public sector job losses.   

No doubt frantic attempts will continue over the next weeks to avoid this scenario, but the chances of success seem to be waning.