Cyprus bonds plunged to a three-month low on Thursday (20 December) after the International Monetary Fund reportedly demanded a Greek-style debt restructuring before agreeing to a bailout.
Earlier that day, German newspaper Sueddeutsche Zeitung reported that the IMF would only agree to participate in a bailout programme for the island nation if part of its debt is written off first.
While some EU countries agree with the IMF that this is the only way to bring the country back on track, others are wary that by repeating the Greek haircut scenario – which earlier this year was repeatedly presented as a “unique”, “one-off case”, trust in the eurozone would diminish further.
“The situation in Cyprus is much worse than it is in Greece,” one high-ranking EU official told Sueddeutsche.
Meanwhile, Cypriot finance minister Vassos Shiarly said the IMF “never raised the subject of a debt haircut.”
Contacted by this website, a spokeswoman for the IMF could neither confirm nor deny the report.
“Discussions continue between the Cypriot authorities, the IMF and the European partners on determining a financing solution for the country that is consistent with debt sustainability. We do not expect the discussions to conclude this year,” the IMF spokeswoman said in an emailed response.
Cyprus had warned that it would be running out of money in a matter of days in the absence of a bailout deal of about €17 billion and the government already had to borrow €250 million from pension funds to pay its civil servants.
On Wednesday, the Cypriot parliament approved the 2013 budget with sweeping spending cuts likely to be demanded by the troika of international lenders – including the IMF – if the bailout is approved.
But asking for a so-called haircut on the country’s debt deals a blow to hopes of a quick deal, as bondholders will first have to negotiate. In Greece’s case, the process took almost half a year.
In addition, Germany is also sceptical a deal can be reached anytime soon. Senior officials in Berlin have indicated negotiations are not “serious enough” for the government to go and ask the Bundestag to approve a bailout for Cyprus.
A leaked report by the German intelligence service raised questions about money laundering for the Russian mafia in the small country, which serves as a lucrative tax haven within the EU and eurozone.
Cyprus joined the euro in 2008 along with Malta. Its banking sector is heavily exposed to the Greek troubles. Cypriot banks took losses on their Greek bonds when the Greek “haircut” was agreed earlier this year.
Out of the €17 billion, more than half would go to the country’s cash-strapped banks. Russia has already bailed out Cyprus once and a possible solution out of the impasse, as reported by Sueddeutsche, would be for Moscow to lend another €5 billion to the IMF, which in turn would pay it to Cyprus, so that no actual IMF money would be involved.