Conservative Nicos Anastasiades has won the first round of a presidential election in Cyprus, and is the favourite in this weekend’s run-off. His election removes a major obstacle to Cyprus’s bail-out, which has been under negotiation with the eurozone since last June.
His Communist predecessor balked at the tough reforms demanded in return for a bail-out. With Anastasiades willing to implement structural change and harsh austerity, relations between eurozone policymakers and Cyprus will improve.
However, finalising the rescue package remains “a labour of Hercules”, as Wirtschaftswoche puts it. Cyprus wants around €18bn, or 100% of GDP. Around €10bn is needed to shore up the banks, shattered by their heavy exposure to Greece’s economic meltdown and their holdings of Greek debt.
As a result, the overall debt pile would rise to 150% of GDP. But as the IMF points out, there is no chance of getting on top of that much debt.
The obvious solution is a restructuring of the debt – write some of it off, in other words – but EU leaders have vowed that the Greek haircut will remain a one-off so as not to rattle investors and spark a potential wave of bond selling across the periphery.
Asking depositors at Cypriot banks to cough up is a possibility, especially as there is so much Russian oligarch money in the banking system, but setting this precedent could trigger deposit flight at other fragile banks in southern states, notes Stelios Bouras in The Wall Street Journal.
To complicate matters further, Russia also seems likely to get involved in the rescue by extending the terms of an existing loan to Cyprus. Whatever fudge the eurozone comes up with, it won’t arrive any time soon.