Brussels, 16/01/2012 (Agence Europe) - The president of Cyprus, Demetris Christofias, has urged the president of the European Commission, José Manuel Barroso, to ensure that a direct bailout of Cypriot banks is possible from the European Stability Mechanism (ESM), retroactively if necessary. In a letter dated 11 January which this newsletter has seen, he explains that the preliminary estimates of bank capital requirements made by US company PIMCO, in the event of an unfavourable economic scenario, suggest that the capital requirements would have a signficant impact on the sustainability of the country's debt, which might further delay the signing of an aid agreement. PIMCO's final report is expected to be released on Friday.
Demitris Christofias says that the financial aid for Cypriot banks, which were badly hit by the writedown of Greek bonds, should be double-pronged. One part should be calculated using the parameters set out in the draft troika Memorandum of Understanding (troika - European Commission, ECB and IMF). In order to be prepared for any need for further capital should the adverse situation considered by PIMCO materialise, an “enhanced credit line” at the ESM should be available to the Cypriot government. Nicosia might not be eligible for a “precautionary conditioned credit line” as is sometimes considered for Spain, given the high level of Cypriot debt as a proportion of GDP.
In his letter, Christofias says that Cyprus is planning to call for a signficant share of the financial aid to be granted to the country for its banks to come from the new tool, the direct bank bailout system under the ESM, once the eurozone bank supervisory system has been set up under the aegis of the ECB.
The talks on how direct bank recapitalisation would occur are already under way and are expected to be concluded by July, the deadline set by the European Summit. Nicosia says that direct bank bailouts should be possible retroactively because if that were not allowed, the positive impact of the new bank bailout system would only apply to what the EU has already done to deal with the crisis, explained Christofias. He said that the problems facing his country were due in part to the exposure of Cypriot banks to the Greek economy and, therefore, the Greek bond writedown. Cypriot bank exposure to the Greek econnomy accounts for nearly a quarter of Cypriot GDP, a burden which the taxpayer was now being asked to shoulder, added Christofias.
In October 2012, three triple-A rated countries, Finland, Germany and the Netherlands, said they disagreed with the idea of retroactive bank bailouts (covering “legacy assets” in the jargon). In September, the three countries said that legacy assets should remain in the hands of the national governments and not all be handed over to the permanent eurozone bailout fund (see EUROPE 10696). Spain and Ireland disagree, hoping to win coverage of their legacy assets. (EL/transl.fl)