EU and IMF officials worked overnight on a rescue package for Cyprus with the aim of presenting the outline of a bailout programme to eurozone finance experts on Friday (15 March) in Brussels, sources said.
The package is expected to contain a mixture of tax increases, one-off revenue raising measures, plans for privatisations and the overhaul of Cyprus's banking sector to ensure that funding for the bailout is sustainable.
It is possible Russia will help finance the programme by extending a €2.5 billion loan already made to Cyprus and potentially reducing the interest rate, officials have said.
The currency area's finance ministers, joined by International Monetary Fund chief Christine Lagarde, will meet in Brussels later on Friday but even if they agree a plan it will not be definitive.
Cypriot Finance Minister Michael Sarris will travel to Moscow for meetings on Monday, a Cypriot diplomat said, raising the possibility that an agreement on participation can be struck with the Russians then.
"I can't give a prognosis on how far the finance ministers will get," German Chancellor Angela Merkel told reporters. "Of course, swift negotiations are desirable, but things take as long as they do until they are solved with quality because we need a sustainable solution."
Cyprus is heavily exposed to the Greek crisis and needs to salvage its banking system, which in recent years has become a haven for rich Russians.
This has raised concerns in Germany, which requested an independent audit of the island’s banks, with a special focus on potential money laundering and tax evasion activities by Russian clients, before Berlin commits to a bailout.
The details of the audit are however subject to intense debate.
“The Cypriot authorities had always resisted an audit by a private company,” said Andreas Frank, an advisor to the Bundestag who has been working with the European Commission on the enforcement of the Anti-Money Laundering Directive (AMLD) .
“According to a legal opinion of the Republic’s Attorney General, such a move would be contrary to Cyprus’ Constitution,” he wrote in an opinion piece published on EURACTIV Germany.
€17 billion needed
Cyprus originally estimated that it needed about €17 billion to restore its economy to health, with up to €10 billion to recapitalise its banks and €7 billion required for servicing debt and running general government operations.
However, officials are working on a bailout of €10-13 billion, the chairman of eurozone finance ministers said on Wednesday, which should help ensure Cyprus's debt-to-GDP ratio is not pushed too high by the bailout.
"The critical meeting on Cyprus will go on through the night if necessary," said a senior eurozone official involved in the talks, which were attended by representatives from the IMF, the European Commission, the European Central Bank.
A delegation from the Cypriot government was waiting in a nearby hotel for the outcome of the discussions, a diplomat said.
The IMF has pushed the idea that depositors in Cypriot banks should bear some of the costs of bailing out the island, a process dubbed "bail-in". But that approach is rejected by Cyprus, the European Commission and members of the ECB, and it remains unclear whether it will be part of the final package.
Instead, officials indicated that it would be comprised of revenues from an increase in the corporate tax rate, income from a one-off tax on bank deposits, or alternatively a tax on income from deposits, and other measures such as privatisation.
Once the framework of the programme is agreed, it will be presented to the Eurogroup Working Group before midday on Friday, officials said. The Eurogroup Working Group comprises senior treasury officials from eurozone member states and other experts and prepares meetings of eurozone finance ministers.
The group will assess whether the plan goes far enough in steadily reducing Cyprus' debt over the coming years and ensuring that the bailout can be paid back – that it is, in EU and IMF jargon, "sustainable".
eurozone finance ministers will then meet at 1600 GMT to consider the package. Officials said the best that could be hoped for was a "political agreement" on the proposal, since input may still be required from Russia to finalise the terms.
Plans are already being made for another meeting of eurozone finance ministers in the middle of next week, once the Cypriot finance minister has returned from Moscow and officials have a more precise idea of the shape of the rescue deal.