EU Ministers Discuss Cyprus Bailout, Bank Rescues

BRUSSELS (AP) -- European Union finance ministers were discussing Monday how to fund a long-delayed bailout for Cyprus, which creditor nations want to commit to tougher conditions, and how to get a regionwide bank rescue fund working.

Finance ministers from the 17-strong group of EU countries that use the euro will ask Cyprus to push ahead with a major privatization program and strengthen its implementation of anti-money-laundering and tax evasion laws, diplomats said before the meeting in Brussels.

Ministers also face the tricky question of how to design the rescue loan package so that it doesn't leave Cyprus with an unsustainably high debt, and addresses whether bank depositors should be forced to pay a share of the cost of the bailout.

Cyprus, a tiny country, is seeking a rescue package of up to €17 billion ($22 billion) -- equivalent to the country's annual economic output -- to prop up its banks and keep the government afloat. Analysts say the bailout would balloon Cyprus' debt to about 145 percent of its economic output, a level most economists consider unsustainable for such a small economy.

Cyprus can no longer refinance its debt, and that pushed the country to request a bailout from its eurozone partners last June. Talks have dragged on ever since, but no agreement was reached with the last, Communist-led government. A new, conservative administration took office last month, and negotiations are expected to pick up speed in hopes of reaching a deal by the end of March, according to EU officials. Ministers are not expected to make final decisions on the Cypriot bailout Monday.

Another issue at Monday's meeting is likely to prove even more difficult to solve: a debate on the conditions under which Europe's new permanent €500 billion bailout fund will be allowed to prop up ailing banks.

A deal struck last year allowing the European Stability Mechanism (ESM) to directly recapitalize banks was one of the eurozone's most important steps in seeking to break the link between banks and governments. Over the past few years, the cost of rescuing ailing banks has dragged down several governments' finances, some of whom had to seek a bailout from their European partners.

Ireland, Spain and other countries that have pumped billions of euros into recapitalizing their ailing banks now want the ESM to foot the bill for past bank bailouts, or at least partly, which would lower the governments' debt burdens. But Germany, the bloc's biggest economy, and others remain opposed to the idea of using taxpayers' money to retroactively fund bank bailouts in other nations. They say the instrument can only be used in future banking crises, once the bloc has centralized bank oversight, from 2014 onward.

The idea is "to compensate Ireland for the recapitalizations that we made when the policy instruments that are now being put in place for other countries weren't available," said Irish Finance Minister Michael Noonan. "There's a valid case for that."

A German official gave that idea a sharp rebuke, indicating there was not much room for compromise.

"Our position on this is clear: It has to be for future cases ... all the more because the available capital is limited," the official said Monday, speaking on condition of anonymity because of the sensitivity of the issue. Germany funds almost a third of all bailouts.

Because stakes in banks are riskier assets than bailout loans to European states, the ESM would have to hold significantly more capital for direct bank injections to maintain its prime rating, which enables it to cheaply raise money on world markets. If that were the case, the fund's lending capacity could be quickly diminished.

On Cyprus, some nations have raised concerns that Cyprus' banks facilitate money laundering and tax evasion, asking that any bailout come with tough external oversight. Cyprus has rejected those allegations.

"The anti-money-laundering laws must not only be put on the books, they must be actually implemented by the banks," said Austrian Finance Minister Maria Fekter.

Cyprus might also face pressure to raise its corporation tax of 10 percent, Europe's lowest rate, to create new revenues to pay off its bailout loans, an EU diplomat hinted Monday.

Cyprus has vehemently rejected calls to raise the tax along with the idea floated by some EU officials that bank bondholders and depositors should accept writedowns to help finance the bailout.

Making bondholders and owners of large bank deposits take a hit has proven controversial, because many economists and leaders fear it might set a precedent that could spook markets, undermining recently regained confidence in the eurozone as whole.

At their meeting, the ministers were also set to discuss granting relief to Ireland and Portugal, which have already received bailouts, by granting them more time to pay back their debt. EU diplomats anticipated wide backing for the proposal in principal, although a formal decision won't yet be made.


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