Cyprus says it is premature to speculate on what conditions Brussels might attach to the bailout it wants.
EU sources said the Cypriot government could ask for 10 billion euros to shore up its banks.
The government itself says no amounts have been discussed. Officials from the ECB, which will carry out an assessment with the European Commission of precisely how much aid Cyprus may require, were due on the island on Monday, two sources told Reuters.
In Cyprus a big fear is that unpopular austerity measures could be imposed and that its low-tax status for businesses could be challenged.
Analyst Fiona Mullen of Nicosia-based economic research consultancy Sapienta said: “We don’t know what the cost will be, what the EU will demand in return for this loan. The biggest worry being they might force an increase in the corporate tax rate, which is currently the lowest in the EU at 10 percent.”
Cypriot banks have lent 29 billion euros to Greece, through government bonds and individual loans; that is 160 percent of Cyprus’s GDP.
Its economy is forecast to shrink 1.2 percent this year and the deficit – at 6.3 percent – is one of the highest in the eurozone.
The banks in the tiny Mediterranean island have been crushed by huge losses sustained when the value of Greek government bonds was written down in an attempt to make Athens’ debt mountain more sustainable.
However, Cyprus’s finance minister has said he does not believe any conditions that come with the EU bailout would be as painful as some believe.
How big a bailout?
Economist Fiona Mullen said it would be wise for Cyprus to request 10 billion euros in order to
avoid going back in six months time to ask for more.
She also suggested this was what the EU was asking Cyprus to do.
“I think 10 billion covers them for three eventualities. The first is the two plus billion that they need for, the immediate need for Cyprus Popular Bank, the second largest bank. The second one is they also need 2.5 billion, around 2.5 billion next year, the government needs this in debt refinancing. And the third reason is, essentially, protecting themselves against the deteriorating loan portfolio in Greece. My own estimate is that if Greece fell out of the euro, then it would cost the banks another five billion, so altogether, that comes to 10 billion.”
“The problem should have been dealt with three to four years ago when the difficulties of the governments and banks began. I think we took too long and now things are difficult. No one is happy with this development, but since it is necessary, there must be a hard negotiation in order to achieve the best result,” said Christakis Papalouisou, a 64-year-old dentist who said his patients are increasingly stressed about the rise in unemployment and economic uncertainty.
“If we have to borrow this money, it has to be repaid and this is going to come from taxes, from all the people over here, and already the people can’t pay any more taxes. The other way is going to be to tax all the companies and in Cyprus, most of the companies that we have have opened here are from abroad and that’s happened because we have low taxes. If the taxes go up, all the companies are going to close and go abroad,” said Panos Christodoulou, a 28-year-old graphic designer who said he is finding it increasingly difficult to find a job with foreign companies in Cyprus.
The manager of a video gaming shop said demand has dropped and two of their shops have closed in the last two years. Aris Miliotis wants the government to restore confidence to restart the economy.
“At this point the thing I am fearing the most is panic — mass panic. What’s going to happen once the ‘troika’ (the European Commission, European Central Bank and International Monetary Fund) comes in and measures are imposed? I think people will not react well,” Miliotis said.