September 23, 2020

Cyprus Rises on Agenda of Overseers of the Euro

BRUSSELS — Finance ministers who oversee the euro are planning to meet here Monday and are expected to choose a new president for their group, as concerns mount about how to rescue Cyprus, which is the fourth country in the euro area to need a bailout.

The gathering of the Eurogroup, as it is known, will be its first monthly meeting this year. And though problems in Cyprus loom large, the ministers are expected to meet in an atmosphere of relative calm.

E.U. officials said Friday that the ministers could decide to hold a vote as soon as Monday night to elect Jeroen Dijsselbloem, 46, the Dutch finance minister as the Eurogroup’s next president. He is the only official candidate to replace the current office holder, Jean-Claude Juncker, the prime minister of Luxembourg.

As president, Mr. Dijsselbloem would play a coordinating role among finance ministers when they make critical decisions like giving political approval for bailouts and pressing governments to shore up their finances to preserve the stability of the euro.

Assuming he is elected, Mr. Dijsselbloem will have Cyprus at the top of his agenda as it seeks to recover from a crisis partly triggered by its banking sector’s heavy exposure to Greek debt. Cypriot lenders took a body blow when those holdings were written down to help Greece manage its debt.

The amount needed to rescue Cyprus is about €16 billion, or $21 billion, which is small compared with the needs of Greece, which has been given or promised about €240 billion in bailout money so far. And yet, to Cyprus, it is a huge amount. Cyprus has a gross domestic product of only about €18 billion raising questions about how Cyprus could ever pay the money back.

But for the Eurogroup, it is a relatively manageable matter, compared with the turmoil of late last year, when the Eurogroup was forced to hold a series of emergency sessions to overcome a series of problems — most notably, sharp differences between Germany and the International Monetary Fund on restarting aid to Greece.

Another sign that a period of acute crisis has passed — for now, at least — will be the absence of Christine Lagarde, the managing director of the I.M.F., which with the European Commission and the European Central Bank makes up the so-called troika that has already overseen bailouts for Greece, Ireland and Portugal.

Ms. Lagarde, who is not a member of the group, regularly sat in on meetings last year, partly to push creditor nations like Germany to do more to keep financial problems in countries like Greece from festering and jeopardizing the stability of the broader European economy.

Mr. Dijsselbloem, in informally campaigning for the Eurogroup presidency, has already made his case to governments during a tour of capitals this month and has been endorsed by Mr. Juncker and other leaders.

But the French government has insisted that Mr. Dijsselbloem explain to the other 16 finance ministers in the Eurogroup how he intends to carry out the job before a vote is held on Monday.

A chief concern for the French is that the Dutch are among those Europeans who have made the toughest demands for fiscal rigor by countries in the euro currency union. The French president, François Hollande, has questioned continued austerity as a solution to the crisis.

The negotiations over Cyprus have been complicated by President Dimitris Christofias, who is the only communist leader in the European Union and is an opponent of raising money through the kinds of privatization of government assets that would be demanded by the troika. European officials also harbor concerns about the extent to which the island country, with its low taxes and lax bank regulation, has become a hub for Russian influence and for money laundering.

“The Cypriot case has all the ingredients to raise questions about the consistency of the euro project again,” Martin Lueck, an economist at UBS, wrote in a briefing note on Friday.

No agreement with the Cypriot government in Nicosia is expected until after the departure of Mr. Christofias, who will not be running in elections scheduled for Feb. 17. If necessary, a second round of voting in Cyprus will be held Feb. 24. International creditors want to wait to negotiate a rescue program with the winner, who is likely to be Nicos Anastasiades of the Democratic Rally, a center-right party.

But even then there would be numerous hurdles to overcome before Cyprus could secure a rescue package.

Chancellor Angela Merkel of Germany and some other European leaders face pressure to shield taxpayers from paying the bill for further bailouts during an election year. Meanwhile, the I.M.F. will probably need to be satisfied that the terms of any deal with Cyprus give the country a reasonable chance of paying back its loans.

One of the most potentially explosive issues is whether to force depositors in Cyprus including wealthy Russians to take haircuts, or losses, on their holdings, to help reduce the burden of recapitalizing and restructuring Cypriot banks.

Holders of Greek sovereign bonds were forced to take losses on their holdings, under the most recent terms of Greece’s bailout. But any move to penalize bank depositors, as is under discussion in the case of Cyprus, would be a new twist in the euro bailout narrative. The measure would be sure to unleash opposition from authorities in Cyprus and in other countries with vulnerable banking systems, who would fear a flight of bank deposits to more secure jurisdictions.

But imposing haircuts “would fit nicely into the populist political discussion that has been gaining momentum in creditor countries, especially Germany,” Mujtaba Rahman, an analyst with the Eurasia Group, wrote in a briefing note last week. “This populism reflects concerns about the very integrity of the Cypriot banking system, the nature of the business it has been involved in, and the government and financial system’s proximity to Russia,” he wrote.

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