Barroso offers a lifeline to Cyprus as bailout cost soars

Cyprus President March 2013.jpg

The European Commission will propose early payments to Cyprus from the EU budget for 2014-2020 and some other measures to help address its soaring bailout needs, says a letter from Commission President José Manuel Barroso to the country’s President Nicos Anastasiades. 

The Commission would propose "frontloading" payments to Cyprus from the EU budget so that allocations for the next seven years are paid early, the letter says.

Under the draft budget as agreed by EU leaders, Cyprus is to get €945 million over the next seven years as EU co-financing for rural development and other projects, as well as direct payments to farmers.

Barroso also proposed that the Commission support Cyrpus' request to be included in the future Youth Unemployment initiative.

The Commission president, however, said that Cyprus should not expect increased allocations under the cohesion and rural development policies. Amounts under those budget have been allocated “in a very precise way, after difficult negotiations subject to unanimity,” the letter said.

Instead, Barroso invited Cypriot officials to develop a needs assessment that would be considered by the Commission.

The move comes against the backdrop of news that the real cost of the Cypriot bailout, initially estimated at €17.5 billion, could reach €23 billion.

The new figure was announced at a meeting of eurozone finance ministers in Dublin. Brussels and the International Monetary Fund plan to stick to the €10-billion bailout already agreed.

Last weekend's Dublin meeting also revealed that bid depositors in Cypriot banks are expected to lose €8.3 billion.

In an effort to “compensate” large foreign depositors, Anastasiades announced that those who lose at least €3 million be eligible to apply for Cypriot citizenship. Many of the big foreign depositors are Russian. 

The Cypriot banking sector got into trouble mainly because it lost €4 billion, or 22% percent of Cypriot GDP, on the restructuring of Greek sovereign debt last year, which itself was a condition for a second emergency loan package from the euro zone to Greece.

Under the bailout deal, Cyprus Popular Bank will be closed and its guaranteed deposits of up to €100,000 transferred to the biggest bank, Bank of Cyprus.

Deposits of more than €100,000 at both banks, too big to enjoy a state guarantee, will be frozen, and some of those funds will be exchanged for shares issued by the banks to recapitalise them.

The big depositors will lose money, but the authorities say deposits up to €100,000 will be protected, a reversal from an earlier plan that would have hit small depositors as well but was vetoed by Cyprus's parliament last week.

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