Cyprus's debt crisis may spread to other euro zone countries, the head of the European Stability Mechanism, Klaus Regling has warned, urging a rapid decision on aid.
"We need a decision soon or otherwise it represents a risk
for the euro zone," Klaus Regling told the France’s Le Figaro
newspaper.
On Wednesday, Standard & Poor's rating agency warned that
Cyprus faces a "material and rising risk" of defaulting on its
sovereign debt, especially, if it doesn’t receive urgent help from
the euro zone and the International Monetary Fund.
But European finance ministers have delayed Cyprus’s international
bailout until March in order to give the country a chance to elect
a new president on Sunday.
Cyprus needs a bailout of around €17 billion, which is nearly as
much as it’s GDP. The Greek sovereign debt restructuring had a
devastating impact on the country’s oversized banking sector. Banks
in Cyprus had a large exposure to neighbouring Greece and had to
write off around 80% of the value of their Greek bond holdings.
According to Finmarket.ru, there’s no certainty that the bailout
would become a salvation for Cyprus as it’ll lead to its national
debt increasing to 140-145 percent of GDP.
Earlier in February the European Union declared it has no plans to
restructure Cyprus's debt and will try to keep down the cost of its
financial rescue.
"We are trying to lower the amount which would be brought
together by the member states," Eurogroup President Jeroen
Dijsselbloem told Dutch broadcaster RTL 7 on Tuesday, Reuters
reports.
Dijsselbloem also said that Moscow may be involved in the final
bailout deal given the €2.5 billion loan it had provided in 2011
and expects to be settled in 2016. In December last year, Cyprus
asked for another loan of €5 billion from Russia, but it has not
been agreed.
“We know that there are many account holders with a foreign
background, (in Cyprus) and part of those are undoubtedly Russian.
That plays a role (in a solution),” he said.
The financial relationship between Russia and Cyprus, which has a
low corporate tax of just 10%, has been close in recent years.
Russians hold deposits worth € 1 billion in Cyprus’ banks.
According to Russia’s Central bank, in 2011 Cyprus became Russia’s
biggest investor, pouring an impressive €13 billion into the
Russian economy.
Also, the amount of Russian “black money” in Cypriot banks
ranges from €8 to 23 billion, according to different
estimates.