FT: Cyprus bailout delayed two more months

20 January 2013

The bailout of Cyprus is set to be pushed back at least two more months, amid mounting disagreement over how to bring down the cost to a manageable level for the debt-laden government.

Although fears Cyprus would run out of cash have dissipated after it tapped previously off-limits cash reserves and Russia showed willingness to delay repayment on a €2.5 billion loan, officials said the delay until late March would push Nicosia to the edge of its ability to fund government and banking operations.

Cyprus’s sovereign debt already stands close to 90 per cent of economic output, and officials estimate the bailout will amount to about €16 billion, nearly doubling Nicosia’s debt load and making it second only to Greece’s in the eurozone. Some €10 billion of the total will go to recapitalising Cypriot banks, which suffered huge losses from Greece’s sovereign debt default last year.

The IMF considers such debt levels unsustainable. While it has been able to give Athens some leeway because Greece’s collapse could have systemic effects, the fund’s officials do not view Cyprus as a systemic risk. In addition to the IMF, several northern eurozone countries, including Germany and Finland, are pushing hard for a sweeping “bail-in” of bank creditors.

The European Commission and the European Central Bank are resisting drastic bank measures out of fear it could panic senior bondholders and deposit holders elsewhere, especially in Spain, where confidence in the financial sector remains tenuous.

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