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I.M.F. and E.U. Set Conditions for Cyprus Bailout I.M.F. and Europe Set Tough Terms for Cyprus Bailout
(about 4 hours later)
BRUSSELS — The International Monetary Fund said on Wednesday it would contribute €1 billion, or about 10 percent of a bailout package for Cyprus in exchange for widespread reforms of the Cypriot economy. BRUSSELS — The International Monetary Fund said Wednesday that it would contribute €1 billion, or about 10 percent, of a bailout package for Cyprus, but stipulated that the country would need to take tough measures to overhaul its beleaguered economy.
“This is a challenging program that will require great efforts from the Cypriot population,” Christine Lagarde, the managing director of the I.M.F., said in a statement. The other €9 billion, or $11.6 billion, of the bailout money is to come from the other 16 euro zone countries whose approval of the terms of the bailout deal are still required.
The goal was to “stand by Cyprus and the Cypriot people in helping to restore financial stability, fiscal sustainability and growth to the country and its people,” Ms. Lagarde said in a second statement she issued jointly with Olli Rehn, the European Union commissioner for economic and monetary affairs. “This is a challenging program that will require great efforts from the Cypriot population,” Christine Lagarde, the managing director of the I.M.F., said in a statement issued by the fund, which is based in Washington.
The statements follow agreement on Tuesday between Cyprus and the so-called troika of international organizations — the European Central Bank, the European Commission and the I.M.F. — that painstakingly negotiated the €10 billion, or $13 billion, bailout and the terms of the deal. The I.M.F.’s commitment follows completion of a memorandum of understanding the organization has drafted with Cyprus and the other two international organizations involved in the bailout, the European Central Bank and the European Commission.
“This is an important development which brings a long period of uncertainty to an end,” Christos Stylianides, a spokesman for the Cypriot government, said Tuesday in a statement made available on Wednesday. Though it has not yet been made public, officials say the document catalogs budget cuts, the privatization of state-owned assets and other conditions Cyprus must meet to receive its periodic allotments of bailout money, amounting to €10 billion.
“Undoubtedly, the completion of the agreement with troika should have taken place a lot sooner, under more favorable political and financial circumstances,” said Mr. Stylianides, who was apparently referring to infighting in Cyprus about responsibility for the financial debacle. The agreement is another strong dose of medicine for Cypriots, who last month agreed to restructure an outsize banking sector by forcing huge losses on bondholders and big depositors in the country’s two biggest lenders.
The memorandum of understanding between Cyprus and the troika outlines budget cuts, privatizations and other conditions Cyprus must meet to receive its allotments of bailout money. A parliamentary vote in Cyprus is needed to approve the deal, while Germany and Finland are also expected to seek the approval of their Parliaments. Officials from the Cypriot government, which still needs its Parliament’s approval of the terms of the memorandum, sought to put a positive spin on the deal.
Olivier Bailly, a spokesman for the European Commission, said Wednesday that the memorandum would not be made public while euro-area governments reviewed the document. But Cypriot authorities on Tuesday described elements of the agreement that they regarded as favorable. “This is an important development which brings a long period of uncertainty to an end,” Christos Stylianides, a spokesman for the Cypriot government, said in a statement made available Wednesday.
Mr. Stylianides, the Cypriot spokesman, said the deal safeguarded important parts of the economy by keeping deposits of natural gas in offshore waters under Cypriot jurisdiction, and by winning two more years until 2018 to hit deficit targets and carry out privatizations. The bailout agreement “should have taken place a lot sooner, under more favorable political and financial circumstances,” said Mr. Stylianides, who was apparently referring to infighting in Cyprus about responsibility for the debacle.
Mr. Stylianides also said the government saved the jobs of contract teachers and of 500 civil servants, and had overcome demands by the troika to tax dividends. Even before the bailout deal, the Cypriot economy was expected to shrink 3.5 percent this year with unemployment hitting nearly 14 percent. Now, under the strict bailout measures, some experts predict the economy could contract 5 percent or more this year, sending unemployment even higher.
Even so, the memorandum could be hotly contested in by the Cypriot Parliament, where many lawmakers have criticized crisis measures that already have been taken, like capital controls, which threaten to make a bleak economic outlook even worse. The memorandum will not be made public before euro zone governments review it, Olivier Bailly, a spokesman for the European Commission, said at a news conference on Wednesday. Euro finance ministers will hold an informal meeting next week in Dublin, where they might give their backing, Mr. Bailly said.
In a move partly aimed at easing those tensions and smoothing parliamentary approval of the memorandum in Cyprus, the government in Nicosia on Tuesday appointed a new finance minister, Harris Georgiades, to replace Michalis Sarris, who resigned. Mr. Sarris has been blamed at home and abroad for his handling of the crisis. Mr. Georgiades was the deputy finance minister. Full legal approval, though, is expected only after the Parliaments in some euro area countries like Finland and Germany, which are helping to pay €9 billion toward the package for Cyprus, vote on the deal.
Over the course of the negotiations to reach a deal for Cyprus, the spotlight fell on whether the I.M.F. was too forceful in pressing countries like Cyprus to limit debt and force losses on investors. The approach of the I.M.F. strained relations with the European Commission, which had harbored concerns about the potentially confidence-sapping effects of such aggressive measures on other economies within the euro area. If those approvals are completed by the end of month, Mr. Bailly said, Cyprus could receive its first aid payment in May.
The I.M.F. proportion of the package Cyprus is smaller than in some previous arrangements for countries like Greece, but that was not a sign of a change in the I.M.F.'s policy in the euro area, said Mr. Bailly, the commission spokesman. The sums given by the I.M.F. depend on “specific situation” in each country, he said, adding that the €1 billion, three-year loan for Cyprus “was unanimously agreed in the troika.” The Cypriot authorities on Tuesday described elements of the agreement that they saw as favorable.
Ms. Lagarde said substantial spending cuts would be needed “to put debt on a firmly downward path” including in areas like social welfare programs. Mr. Stylianides, the Cypriot spokesman, said the deal safeguarded important parts of the economy by keeping potentially valuable deposits of natural gas in offshore waters under Cypriot jurisdiction, and by winning two more years, until 2018, to hit deficit targets and carry out privatizations.
But she said the plan, which the I.M.F. could agree to early next month, sought fairness. Mr. Stylianides also said the government saved the jobs of contract teachers and of 500 civil servants, and had overcome demands by the international lenders to tax dividends.
But the memorandum could be hotly contested by the Cypriot Parliament, where many lawmakers have criticized crisis measures that already have been taken, like capital controls — tight restrictions on transfers and withdrawals of money — that threaten to make a bleak economic outlook even worse.
In a change partly aimed at easing those tensions, the government in Nicosia on Tuesday appointed a new finance minister, Harris Georgiades, to replace Michalis Sarris, who resigned. Mr. Sarris has been criticized at home and abroad for his handling of the crisis.
Mr. Georgiades, who had been the deputy finance minister, said Wednesday that capital controls would be lifted “gradually” and that the country would meet all of its bailout targets.
Over the course of the negotiations to reach a deal for Cyprus, the spotlight fell on whether the I.M.F. was being too forceful in pressing for the country to quickly reduce its debt and require losses on bank shareholders and big depositors. The I.M.F.’s approach strained relations with the European Commission, which had harbored concerns about the confidence-sapping effects that such aggressive measures might have on other economies within the euro area.
In an apparent show of unity on Wednesday, Ms. Lagarde jointly issued a second joint statement with Olli Rehn, the E.U. commissioner for economic and monetary affairs, pledging to “stand by Cyprus and the Cypriot people in helping to restore financial stability, fiscal sustainability and growth to the country and its people.”
The I.M.F. proportion of the package for Cyprus is smaller than in some previous arrangements for countries like Greece. But Mr. Bailly, the commission spokesman, said it did not signal a change in the I.M.F.’s policy in the euro area.
The sums given by the fund depend on the “specific situation” in each country, he said, adding that the €1 billion, three-year loan for Cyprus was unanimously agreed upon by the I.M.F., the European Commission and the European Central Bank, which collectively make up what is known as the troika.
Ms. Lagarde said Cyprus needed to make substantial spending cuts “to put debt on a firmly downward path,” including in areas like social welfare programs. But she said the plan sought to be even-handed.
“The fiscal and financial policies of the program seek to distribute the burden of the adjustment fairly among the various segments of the population and to protect the most vulnerable groups,” she said.“The fiscal and financial policies of the program seek to distribute the burden of the adjustment fairly among the various segments of the population and to protect the most vulnerable groups,” she said.
More than 95 percent of account holders at Laiki Bank, which will be closed under the plan, and at the Bank of Cyprus, which is being restructured, were fully protected, she said. Bank of Cyprus and Laiki Bank are the two biggest banks in the island nation. More than 95 percent of account holders at Laiki Bank, which will be closed under the plan, and at Bank of Cyprus, which is being restructured, were fully protected, she said.
Key fiscal measures included raising the country’s corporate income tax rate to 12.5 percent from 10 percent, she said. The main fiscal measures, she said, included raising the country’s corporate income tax rate to 12.5 percent from 10 percent.