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Article updated: 3/4/2013 10:18 AM

EU finance ministers discuss Cyprus bailout

Managing Director of the International Monetary Fund Christine Lagarde, right, waves to Greek Finance Minister Yannis Stournaras, left, and French Finance Minister Pierre Moscovici during a meeting of eurogroup finance ministers in Brussels on Monday.

Managing Director of the International Monetary Fund Christine Lagarde, right, waves to Greek Finance Minister Yannis Stournaras, left, and French Finance Minister Pierre Moscovici during a meeting of eurogroup finance ministers in Brussels on Monday.

 

Associated Press

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By Associated Press

BRUSSELS -- European finance ministers are meeting Monday to discuss how to fund a long-delayed bailout for Cyprus amid demands from creditor nations that the cash-strapped island must commit to tougher conditions.

Finance ministers from the 17-strong group of European Union countries that use the euro will ask Cyprus to push ahead with a major privatization program and strengthen its implementation of anti-money-laundering and tax evasion laws, diplomats said ahead of the meeting in Brussels.

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Ministers also face the tricky question of how to design the rescue loan package so that it doesn't leave Cyprus with an unsustainably high debt burden and whether bank depositors should be made to pay a share of the cost of the bailout.

Tiny Cyprus is seeking a financial rescue package of up to (euro) 17 billion ($22 billion) -- equivalent to the country's economic output -- to prop up its banks and keep the government afloat. Analysts say the bailout would send Cyprus' debt ballooning to about 145 percent of its economic output, a level most economists consider unsustainable for such a small economy.

Cyprus can no longer refinance its debt, which pushed the country toward requesting a bailout from its eurozone partners last June. Talks have dragged on since, but no agreement was reached with the last, communist-led government. A new, conservative administration took office last month, and negotiations are expected to pick up speed in hopes of reaching a deal by the end of March, according to EU officials. Ministers were not expected to make final decisions on the Cypriot bailout Monday.

"We will have an exchange of views on the situation in Cyprus, especially on the fight against money-laundering, with our new colleague," French Finance Minister Pierre Moscovici said before the meeting, referring to his new Cypriot counterpart Michael Sarris.

Germany and others have raised concerns that Cyprus' banks facilitate money-laundering and tax evasion, asking that any bailout must come with tough external oversight. Cyprus has rejected those allegations.

"The anti-money-laundering laws must not only be put on the books, they must be actually implemented by the banks," said Austrian Finance Minister Maria Fekter.

Cyprus might also face pressure to raise its corporation tax of 10 percent, Europe's lowest rate, to create new revenues to pay off its bailout loans.

"The level of taxation is very low in Cyprus," an EU diplomat said Monday. "Overall, this is about achieving a better balance between expenditure and revenues," he said, speaking on condition of anonymity because of the sensitivity of the matter.

Cyprus has vehemently rejected calls to raise the tax along with the idea floated by some EU officials that bank bondholders and depositors should accept writedowns to help finance the bailout.

Making bondholders and owners of large bank deposits take a hit has proven controversial, because many economists and leaders fear it might set a precedent that could spook markets, undermining recently regained confidence in the eurozone as whole.

At their meeting, the ministers were also set to discuss granting relief to Ireland and Portugal, which have already received bailouts, by granting them more time to pay back their debt. EU diplomats anticipated wide backing for the proposal in principal, although a formal decision won't yet be made.

More controversy was expected on the issue of defining the conditions of when Europe's new permanent bailout fund ESM will be allowed to directly prop up ailing banks. Ireland and others -- who have dumped billions of euros into recapitalizing banks in the wake of the 2008-2009 financial crisis -- want the fund to include past bank bailouts.

The idea is "to compensate Ireland for the recapitalizations that we made when the policy instruments that are now being put in place for other countries weren't available," said Irish Finance Minister Michael Noonan. "There's a valid case for that."

But Germany, the bloc's largest economy, remains staunchly opposed to the idea of using taxpayers' money to retroactively fund bank bailouts in other nations, saying the available funding is limited and the instrument can therefore only be used in future banking crises once the bloc also has centralized bank oversight.

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