BRUSSELS: Just when European leaders thought they were getting to grips with three years of economic turmoil, along came Cyprus, a seemingly small problem but one that cannot be ignored.
While the Cypriot economy may be worth only 18 billion euros, making it the third smallest in the euro zone, the problems it poses are among the most complex Europe has faced, combining elements of Greece, Spain and Ireland.
The latest estimates from analysts are that the country needs 17.5 billion euros to get back on its feet, including 10 billion for its fractured banking sector and up to 7.5 billion for general government operations and debt servicing.
While small in nominal terms, that would amount to almost 100 per cent of its gross domestic product, making it the biggest euro zone rescue after Greece and nearly three times the size of the package that was granted to Portugal in 2011.
There's no question that the euro zone has the money to help, the problem is how Cyprus could ever afford to pay the money back - the bailout is just not sustainable.
And unless it is made sustainable, the International Monetary Fund will not take part, which would cast doubt on its overall credibility.
"Cyprus is, on a country level, the most serious risk the euro zone faces today," Charles Dallara of the Institute of International Finance, the industry group that negotiated the debt restructuring in Greece last year, said last week.
"I see a disconnect between Cyprus and its euro zone partners, and I see little sense of how to bridge the gap."
DRAWN OUT PROBLEM
In a sense, Cyprus is not a new problem - the country first asked for assistance in June last year and has spent the past seven months in on-off negotiations with the European Commission, the European Central Bank and the IMF on a package.
In the weeks ahead, once elections have been held on Feb. 17 and a new Cypriot president is in place, those talks will come to a head, with the EU and IMF finally certain of who in Cyprus will be responsible for meeting targets in the aid programme.
It is possible that the details will be finalized in time for euro zone finance ministers to discuss at the end of March, although some EU officials hint that it could be delayed longer than that, potentially until May. Despite the delays, the broad components of a package are already in circulation.
Cypriot and EU officials indicate that it is likely to require the privatisation of state assets - such as the state telecoms firm - major pensions reform, the possibility of a one-off tax on the island's 800,000 citizens and fundamental restructuring of its bloated banking sector.
But even if all of those steps are taken, a big 'if' in itself, they will not generate sufficient extra revenue or savings to cut Cyprus's debts to a sustainable level.
While its debt-to-GDP ratio currently stands at around 80 per cent, the net cost of the bailout would push it up to around 140 or 150 per cent of GDP, officials in Brussels have estimated, a figure that is decidedly not sustainable.
From the IMF's point of view, it has to be brought below 120 per cent, and some officials have said it needs to be closer to 100 per cent if it is to be made truly manageable.
indiatimes.com
While the Cypriot economy may be worth only 18 billion euros, making it the third smallest in the euro zone, the problems it poses are among the most complex Europe has faced, combining elements of Greece, Spain and Ireland.
The latest estimates from analysts are that the country needs 17.5 billion euros to get back on its feet, including 10 billion for its fractured banking sector and up to 7.5 billion for general government operations and debt servicing.
While small in nominal terms, that would amount to almost 100 per cent of its gross domestic product, making it the biggest euro zone rescue after Greece and nearly three times the size of the package that was granted to Portugal in 2011.
There's no question that the euro zone has the money to help, the problem is how Cyprus could ever afford to pay the money back - the bailout is just not sustainable.
And unless it is made sustainable, the International Monetary Fund will not take part, which would cast doubt on its overall credibility.
"Cyprus is, on a country level, the most serious risk the euro zone faces today," Charles Dallara of the Institute of International Finance, the industry group that negotiated the debt restructuring in Greece last year, said last week.
"I see a disconnect between Cyprus and its euro zone partners, and I see little sense of how to bridge the gap."
DRAWN OUT PROBLEM
In a sense, Cyprus is not a new problem - the country first asked for assistance in June last year and has spent the past seven months in on-off negotiations with the European Commission, the European Central Bank and the IMF on a package.
In the weeks ahead, once elections have been held on Feb. 17 and a new Cypriot president is in place, those talks will come to a head, with the EU and IMF finally certain of who in Cyprus will be responsible for meeting targets in the aid programme.
It is possible that the details will be finalized in time for euro zone finance ministers to discuss at the end of March, although some EU officials hint that it could be delayed longer than that, potentially until May. Despite the delays, the broad components of a package are already in circulation.
Cypriot and EU officials indicate that it is likely to require the privatisation of state assets - such as the state telecoms firm - major pensions reform, the possibility of a one-off tax on the island's 800,000 citizens and fundamental restructuring of its bloated banking sector.
But even if all of those steps are taken, a big 'if' in itself, they will not generate sufficient extra revenue or savings to cut Cyprus's debts to a sustainable level.
While its debt-to-GDP ratio currently stands at around 80 per cent, the net cost of the bailout would push it up to around 140 or 150 per cent of GDP, officials in Brussels have estimated, a figure that is decidedly not sustainable.
From the IMF's point of view, it has to be brought below 120 per cent, and some officials have said it needs to be closer to 100 per cent if it is to be made truly manageable.
indiatimes.com
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