Cyprus should be allowed to recapitalise its Greece-exposed banks directly from the EU's permanent bailout fund, the head of its central bank said on Monday.
The island can also manage the debt burden it takes on when receiving financial aid, and speculation it would not be able to do so is not "well-founded", said Panicos Demetriades, who sits on the European Central Bank's Governing Council.
Cyprus sought EU and IMF aid in June after its two largest banks suffered huge losses on a write-down of their Greek debt holdings. But ratings agencies have warned the island risks taking on too much debt to bail out its banks.
"By Cypriot banks receiving capital support directly from the ESM, not only is the stability of the domestic financial system safeguarded but financial stability in the EU is enhanced as well," Demetriades told bankers in Nicosia.
Demetriades is the second Cypriot official in less than a week to highlight the need for the island's banks to have direct access to the European Stability Mechanism (ESM).
The combined loss from the Greek writedown forced on private-sector lenders and sanctioned by EU leaders was equivalent to 25% of Cyprus's 17 bln euro GDP.
German Chancellor Angela Merkel on Friday said banks could not be retrospectively recapitalised via the ESM, but the Cypriots are holding out hope.
Finance Minister Vassos Shiarly told reporters on Friday that direct access would be a "firm demand" in upcoming discussions with international lenders.
Cyprus, Demetriades said, "should not be treated less favourably than other countries".
"There are at least three reasons in my mind why public debt will remain sustainable, even after adding a new loan amounting to 60% of GDP.., (it) emanates from the observation that the loan is primarily intended to recapitalise the banking system," Demetriades said.
Even though the ESM facility may not be operational until as late as January 2014, Cyprus could still replace part of a loan from the EFSF - the EU's current temporary funding arm - with a direct capital injection into the banks from the ESM, he said.
His reference to a loan amounting to 60% of Cyprus's GDP, or about 10 bln euros, is often given as a figure for Cyprus's bailout requirements.
Demetriades said authorities had no way of knowing the true requirements until an asset-quality review of the banking system by consultancy Pimco was completed.
He said bailed-out banks could be privatised within three years, while the discovery of rich natural gas deposits off Cyprus's southern coast would substantially enhance public finances.
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