13 March 2013

WSJ: Troika, Cyprus in talks to shrink bailout package

Cyprus's government and international lenders are seeking ways to cut sharply the size of a bailout package for the country, in negotiations in Nicosia that could pave the way for a political agreement on the months'-long rescue talks.

Officials from the troika of lenders—the European Commission, the European Central Bank and the International Monetary Fund—are working with the Cypriot government to bring the headline figure for the bailout package to about €10 billion. The aid package had been earlier expected to be as much as €17 billion—with just shy €10 billion of that going for bank recapitalisations.

Some countries, including paymaster Germany, need to ratify the bailout package in their national parliaments. Leaders from the 17 eurozone nations will meet ahead of the Eurogroup, and are expected to discuss Cyprus's rescue with newly-elected Cypriot president Nicos Anastasiades.

The smaller aid envelope for the island nation could help alleviate concerns about its heavy future debt load, which would deter the IMF from signing off on a deal. While the €17 billion package would catapult the country's debt to about 150 per cent of annual economic output, the officials in Nicosia are hoping to agree on a set of measures that will contain the debt load at around 100 per cent of gross domestic product in 2020, below the goal the IMF has insisted on in past negotiations over Greece.

Measures under discussion in Nicosia include a move by the government to invest state pension fund reserves in government bonds. This would hurt them less than subjecting them to losses as would likely occur if big bank depositors are forced to contribute to the aid package in a depositor "bail-in“. Some countries, like the Netherlands, Germany and Finland, have pushed for a cut in large private bank deposits to reduce the size of the bailout, a step that would directly hit pension funds that hold big deposits with Cypriot banks.

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