Cyprus Bailout Seen as Near, but Not Yet a Done Deal

Seeking to stave off financial collapse, Cyprus said Friday that it had negotiated a multibillion-euro bailout with international lenders, only to have the claim contradicted later by a formal statement from those creditors.

The European Commission, European Central Bank and International Monetary Fund, collectively known as the troika, said there had been “good progress toward agreement on key policies to strengthen public finances, restore the health of the financial system, and strengthen competitiveness.”

It added that “preliminary results of a bank due-diligence exercise, expected in the next few weeks, will inform discussions between official lenders and Cyprus” on the details of a bailout.

Those comments suggest that Cyprus has agreed to the austerity measures that will accompany the loans. But a lack of clarity over how much capital the country’s stricken banks may need is holding up a final agreement.

Cyprus is expected to receive about 16 billion to 17 billion euros ($20.6 billion to $22 billion), a small amount by comparison with other European rescues but a sum roughly equal to the country’s annual gross domestic product.

Talks are continuing on how to unlock a 31.5 billion euro installment of loans for Greece from its international bailout program, money it needs to stave off bankruptcy. Euro zone finance ministers, who failed to reach a deal earlier this week, will resume discussions Monday.

The deterioration of Greece’s finances in the midst of a recession has made the deal elusive; the economic slowdown is preventing the country from hitting its financial targets.

Greece’s finance minister, Yannis Stournaras, said Friday that a compromise was near in which the I.M.F. would agree that Greece’s debt could fall to 124 percent of G.D.P. by 2020 as opposed to a previous target of 120 percent.

Euro zone finance ministers have already agreed on measures that would reduce Greece’s debt to 130 percent of G.D.P. by 2020, Mr. Stournaras said. He said that a further 10 billion euros of savings would need to be found to bring debt down to the level desired by the I.M.F. by 2020.

The austerity measures Greece has undertaken in exchange for its bailouts have pushed Cyprus to seek alternative forms of financial assistance from outside the European Union, including from Russia.

Before the lenders issued their statement Friday contradicting Cyprus, Cypriot officials said that a deadline set by the European Central Bank to recapitalize the country’s banks had forced them to agree to a bailout.

“The bailout deal includes unpleasant measures,” the government spokesman, Stefanos Stefanou, said without elaborating.

The conditions of the bailout have caused friction between government officials and international lenders in recent weeks, though financial markets have been relatively relaxed about the negotiations.

“In other circumstances this issue might have garnered more attention from markets, but it has been swamped by events elsewhere, including in Spain and Greece in particular,” said Kenneth Wattret, co-head of European economics in London for BNP Paribas.

Mr. Wattret said that one reason for the lack of market reaction was that Cyprus seemed to be heading toward an agreement. A failure by politicians to reach a deal would have worried investors more than a bailout, he said, as it would have called into question the effectiveness of Europe’s crisis response.

“Still, once a deal has been struck, one potential source of event risk is removed,” he added.

Fitch Ratings said Friday that it was cutting its credit ratings on three of the island’s banks — Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank — which together have assets of 77.2 billion euros, equal to about 430 percent of G.D.P. The ratings agency said it thought that the failure of Bank of Cyprus and Cyprus Popular Bank was “imminent” and that the two would require “sizable” injections of capital.

The agency pointed out that the precedents set in other euro zone bailouts meant that the investments of senior bank creditors were likely to be protected.

On Wednesday, Fitch downgraded Cyprus’s rating for its long-term sovereign debt to BB- from BB+, adding that the outlook was negative.

If Cyprus does reach a bailout agreement, it will follow in the footsteps of Greece, Ireland and Portugal, all of which had to be rescued by Europe and the International Monetary Fund. In addition, Spain has been offered up to 100 billion euros in aid for its crippled banking sector and may seek more help.

The economic crisis in Greece has spilled over to Cyprus. Cyprus’s economy, particularly its banking sector, is heavily exposed to Greece and Greek institutions.

David Jolly contributed reporting.

Article source: http://www.nytimes.com/2012/11/24/business/global/cyprus-bailout-seen-as-near-but-not-yet-a-done-deal.html?partner=rss&emc=rss