Cyprus may soon need a bailout, making it the fourth country in the European Union, after Greece, Ireland and Portugal, to officially request an international aid plan. This was the alarm raised yesterday by Bank of Cyprus, the largest commercial bank on the island, which called for decisive action by the country's political class.
“Markets move quickly, in this situation disagreement and indecision are punished, determined actions are rewarded. By doing nothing, we risk endangering our refinancing capacity: the consequences would be disastrous”, communicates the institute. "The threat of entering a European Union bailout programme, with all the serious implications, is immediate". The appeal follows by a couple of weeks that of the governor of the Cypriot central bank, Athanassios Orphanides, who had envisaged the need for international aid to resolve the terrible economic and political crisis affecting the country.
However, the European Commission immediately denied it: "The question of a financial aid package for Cyprus is not on the table", they announced from Brussels. “We are confident that Cyprus will be able to fulfill its deficit commitments (below 4% of GDP in 2011 and below 2,5% in 2012). The Cypriot authorities can count on the Commission's full support in their efforts to consolidate finances and relaunch the country's economy, but they must do what is necessary”.
According to the Bank of Cyprus, any recourse to external bailouts could seriously damage the country's reputation. The island offers a variety of tax breaks for international businesses and may no longer be able to do so under the yoke of an international aid plan. In fact, European countries could raise their voice against the tax relief system that has allowed Cyprus in recent years to become an important center of financial services.
The situation on the island is very critical and aggravates the already difficult moment experienced by the entire European Union. Under tension from the Greek events, Cyprus has suffered three more severe blows in the space of a few weeks. The political paralysis due to the lack of agreement on the austerity measures necessary for the consolidation of public finances was joined by the explosion in the country's main power plant and the downgrading of government bonds by the main rating agencies, with Standard & Poor's recently downgraded the title to BBB+. The main cause was the enormous quantity of Greek securities, estimated at 5 billion euros, held by Cypriot banks and the fact that the country's economy is highly exposed to the events of the Greek country through trade.
The July 11 explosion at a Navy military base magnified the problems. The story dates back to January 2009, when a cargo ship carrying ammunition from Iran to Syria was intercepted by the US Navy under a UN mandate. The vessel was escorted to a port on the island of Cyprus. Inside were found ammunition, bullets, gunpowder, priming materials. All for almost a ton of explosive material. European countries refused to take care of the cargo. The United States promised to assist Cyprus in disposing of the material but no action followed through on the promise. So waiting to break the deadlock, the naval base commanders crammed everything into a tent inside the base. Until July 11, two years later, a fire that broke out near the tent quickly reached it, causing a very violent explosion: 13 dead and the largest power plant, which offered about half of the entire electricity requirement of the Country, destroyed. Estimates for repairing the damage to the plant exceed two billion euros.
The background explains why Cyprus could however receive aid from European funds for infrastructure development, which should limit the risk of needing a bailout. The accident had drastic consequences. The entire Council of Ministers has resigned and the country is now waiting for President Dimitris Christofias to form a new government. Forecasts for economic growth have been revised. The estimates of 1,5% for this year and 2,5% for 2012 have been lowered to 0% for this year and about 1% for next year, given the significant expenses for the reconstruction of the plant and losses related to power outages for businesses. Finally, although denied by the Commission, the hypothesis of a further rescue plan by Europe to put the finances of the small eastern Mediterranean country in order.
Cyprus could thus be the fourth country of the 17 euro area to need a bailout plan, after Greece, Portugal and Ireland. Admittedly the island is economically insignificant within the monetary union, accounting for 0,2% of the eurozone economy. The country's GDP in 2010 was 25 billion euros (half that of the island of Rhodes). The estimate of what is needed to put the country's finances back on track amounts to 2,7 billion euros for 2011. A figure that certainly would not put the European countries under strain, which have already spent a total of 382 billion euros. The most serious signal, however, would be the umpteenth proof of how easily the contagion can be spread and how the problems of one state can quickly affect neighboring ones.
