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Cyprus clinches first €2 billion bail out installment

Published time: May 13, 2013 10:33
Edited time: May 13, 2013 15:22
Cypriots walk outside a Bank of Cyprus branch on the island's capital Nicosia (Reuters / Andreas Manolis)

Cypriots walk outside a Bank of Cyprus branch on the island's capital Nicosia (Reuters / Andreas Manolis)

Cyprus has secured a €2 billion bailout from its Troika lenders. The money will be used for debt service and fiscal consolidation, and the second installment is due by the end of June.

Eurozone officials in Brussels signed off on the first 2 billion euro tranche of the 10 billion euro bailout loan to Cyprus from the troika of international creditors – the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Commission (EC). The financial aid comes with around 2.5 percent interest and is to be paid back over a 12-year period after a grace period of a decade.

The restructuring of banks and the gradual lifting of restrictions on capital movement were among the priorities for the island’s aid programme, as a senior eurozone official told the Cyprus Mail.

Depositors in the island’s biggest banks - Bank of Cyprus and Laiki Bank will practically pay for the bailout. To collect the money, Nicosia decided to tax of up to 60 percent on deposits of over 100,000 euro in the two big banks.

Russia, one of the closest business partners with Cyprus, also agreed to assist  the troubled island. Moscow agreed to cut the interest rate to 2.5 percent from 4.5 percent on a loan it fixed in 2011. Maturity dates remain under discussion, even though Cyprus's Foreign Minister Ioannis Kasoulides said Russia had agreed to extend the terms of the loan.  "Requests for an extension were received, and we promised that the request would be dealt with. If anyone wants to draw the conclusion from that promise that a deal has already been signed, let them do so," Russian Deputy Finance Minister Sergei Storchak told journalists on the sidelines of the annual congress of the European Bank for Reconstruction and Development. Under the initial terms the money should be paid back within four and a half years.

Greece will also be on the agenda of Monday's meeting, as the Eurogroup ministers will decide on the next two installments to Greece totalling 7.4 billion euro.

A week ago the International Monetary Fund said Greece is "making progress" in overcoming "deep-seated problems", adding that country still needed to find ways to tackle its financial problems with structural reform rather than draconian cuts. "Progress on fiscal adjustment has been exceptional by any international comparison," the IMF said in its regular report. But this primarily came as a result of slashing jobs and salaries, which caused "unequal distribution of the burden of adjustment," the IMF said.

Athens and Thessaloniki municipality workers and contract workers march towards the Greek parliament in Athens to protest the latest law tablet to parliamnet on April 26, 2013 (AFP Photo)

Who’s next… Slovenia?

The Brussels meeting will take place amid continued concerns for Slovenia which is seeking ways to avoid the need for a bailout package.

At the end of April Moody's Investors Service cut the country's credit rating to junk status, saying  the banking system was struggling and the national balance sheet was deteriorating. In this situation privatizing Slovenia's largely state-owned banking sector and creating a "bad bank" to take over non-performing loans were the priority goals, according to Prime Minister Alenka Bratusek, talking to The Economic Times.

Last week Slovenia's government tailored an austerity plan to raise 540 million euro in new taxes to balance the budget without international help. Under the game plan, the government is due to partially privatize 15 state-run companies, such as Slovenia’s second-largest bank Nova Kreditna Banka Maribor and Ljubljana airport.

Though having jumped to 64 percent of the country’s GDP, Slovenia’s debt remains at the lower end of that scale in the euro area, Bratusek said.

German Finance Minister Wolfgang Schaeuble also believes Slovenia can get by without an international bailout, provided it introduces reforms.

"Slovenia can manage (without a bailout program). However it must also carry out some painful restructuring (of its economy)," Schaeuble told SWR 2 radio.

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