Cyprus president calls for bailout overhaul to save economy

Mr Anastasiades is in effect asking for More eurozone loans on top of the existing €10bn sovereign bailout

By Peter Spiegel

Cyprus’ president has asked eurozone leaders for a complete revamp of his country’s €10bn bailout, warning Nicosia may not be able to meet the rescue’s current terms because it has harmed the country’s economy and banking system even more than expected.

In a letter sent last week and obtained by the Financial Times, Nicos Anastasiades wrote that the restructuring of the country’s two largest banks was “implemented without careful preparation”, wiping out the working capital of many Cypriot companies and requiring unprecedented capital controls that were suffocating the island’s economy.

 “[The] economy is driven into a deep recession, leading to a further rise in unemployment and making fiscal consolidation all the more difficult,” Mr Anastasiades wrote to the heads of three EU institutions and the International Monetary Fund. “I urge you to review the possibilities in order to determine a viable prospect for Cyprus and its people.”

Mr Anastasiades has asked EU leaders to unwind the complex restructuring and partial merger of its two largest banks, which account for 80 per cent of the domestic banking sector, backed by further eurozone loans.

A senior eurozone official directly involved in the Cypriot talks said EU officials were “puzzled” by the letter, adding finance ministers would discuss it at a regularly scheduled meeting on Thursday.

“Essentially he is asking for a complete reversal of the programme,” the official said, adding that the failure to prepare for the bailout’s impact was partially the fault of Mr Anastasiades’ government, which initially voted down a rescue package before accepting a similar deal nine days later.

Mr Anastasiades’ warning comes less than a month after the IMF harshly criticised the EU’s handling of Greece’s first €110bn bailout, arguing its assumptions were far too optimistic.

The Cyprus bailout forced both the closure of the island’s second-largest financial institution, Laiki bank, and a drastic restructuring of its largest, Bank of Cyprus. Controversially, it required depositors with more than €100,000 in both banks to pay for the bailout by seizing cash from their accounts. None of the €10bn in rescue loans provided by the EU and IMF is to go to shoring up either bank.

In his letter to the eurogroup of finance ministers and “troika” of international lenders, Mr Anastasiades said those terms had proven too onerous for Bank of Cyprus, the island’s only remaining “mega-systemic bank”, and were making it nearly impossible for the bank to raise the cash needed for day-to-day operations. “The success of the programme approved by the eurogroup and the troika depends upon the emergence of a strong and viable BOC,” he wrote.

Although the letter does not explicitly request more money, Mr Anastasiades is in effect asking for further eurozone loans on top of the existing €10bn sovereign bailout – something specifically ruled out by a German-led group of countries at the time.

He asks for part of the €9bn given to Laiki in so-called emergency liquidity assistance by the eurosystem’s central banks to be converted into long-term bonds. These bonds would be used to unwind the partial merger of the “good” bit of Laiki with Bank of Cyprus.

Mr Anastasiades argues that Laiki received the so-called “emergency liquidity assistance” last year “under very questionable circumstances” – a direct criticism of the European Central Bank, which approves all ELA lending.

The barb is an apparent reference to the ECB’s decision to approve lending to Laiki even after it became clear to many critics it was insolvent. Jörg Asmussen, the ECB board member responsible for eurozone crisis issues, defended the decision during a grilling by the European parliament last month, arguing the possibility of a future recapitalisation with public money meant it was still viable at the time.