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DOUBLE SPEAK? Cyprus and Troika not yet agreed on bailout

23 November, 2012

 * “Yes, we signed” says Nicosia; “We are close” says Troika *

Cyprus and the Troika of international lenders are far apart from any agreement that will result in a bailout estimated at 17.5 bln euros, with negotiators from Brussels saying that there was significant progress towards a deal, while government officials declared that a deal had already been signed.
Similarly, President Demetris Christofias had been saying all along that we he would not sign any memorandum with the Troika, only to change his tune later to say that it still needed work.
Whatever the double speak, the Cypriot people were fed false hopes on Thursday night and Friday morning, believing that some deal had been concluded and that work would finally begin on rebuilding the economy and regaining the island’s credibility.
A joint statement issued on Friday afternoon by the European Commission, the European Central Bank and the International Monetary Fund in effect refuted government statements, saying that their mission “has had productive discussions with the Cypriot authorities on the policy building blocks of a macroeconomic adjustment programme.”
“The authorities and EC/ECB/ IMF teams made good progress towards agreement on key policies to strengthen public finances, restore the health of the financial system, and strengthen competitiveness, so as to pave the way for the economy to return to sustained growth and financial stability,” the Troika statement said.
“Discussions are expected to continue from respective headquarters with a view to making further progress toward a potential programme. The preliminary results of a bank due-diligence exercise, expected in the next few weeks, will inform discussions between official lenders and Cyprus on financing solutions consistent with debt sustainability.”
Hours earlier, the Cyprus government said that it had agreed a bailout package with the EU and IMF and that it expected the lenders to confirm the deal later on Friday.
"There is convergence on the appropriate policy conditionality, but a final agreement including financing needs cannot be reached until there is more clarity on banks' capital needs, following the due-diligence exercise," one euro zone official with insight into the talks was quoted by Reuters as saying.
An review on the state of Cypriot banks is expected by December 3, when euro zone finance ministers meet again in Brussels and aim to decide on a programme for the government in Nicosia.
Once agreed, the bailout will make Cyprus the fourth euro zone country to get a sovereign rescue after Greece, Ireland and Portugal. Spain has been granted financial aid to recapitalise its banking sector, but Madrid has not so far asked for money to cover the government's needs.
Cyprus sought financial aid in June, after its banks were battered by their exposure to the Greek crisis, with nearly 4 bln euros worth of sovereign bonds subject to a radical haircut and further 16 to 20 bln euros in loans hanging in the balance.
Late on Thursday night, the government’s official Cyprus News Agency had reported that “Government negotiations with Troika (EC, ECB, IMF) for a rescue package were concluded at about 20.00 on Thursday,” adding that “Central Bank Governor Panicos Demetriades and Senior Central Bank official Spyros Stavrinakis are said to have played a catalytic role in order for the agreement to be reached, the same sources say.”
In a similar tone, a CyBC correspondent reported on Thursday evening that Labour Minister Sotiroulla Charalambous, too, had played a catalytic role in securing Cyprus’ demands on labour rights.
The Troika negotiators left Cyprus on Thursday unable to convince the communist-led government to agree to reforms in the national pension fund, drastic cutbacks in public spending, the privatization of profit-making utilities and establishing a wealth fund to manage future revenues from offshore gas explorations, which are not expected to come on line any time sooner than 2018.
About 10 bln euros of the bailout amount will go towards recapitalising the island’s two main banks – Bank of Cyprus and the recently-nationalised Cyprus Popular Bank – with the rest expected to roll over some 6 bln euros in government debt and 1.5 bln euros to pay urgent government needs, such as civil service wages and bonuses, less than three months away from the next crucial presidential elections.