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COLD SHOWER: Merkel holds back on Cyprus bailout

09 January, 2013

 * Reforms needed; Concerns over transparency, money laundering *

German Chancellor Angela Merkel said on Wednesday she expected talks on a bailout deal for Cyprus to take time, while a senior member of her coalition said parliament was not yet ready to approve any financial aid.

Cyprus, whose economic woes stem from its banks' heavy exposure to crisis-racked Greece, requested financial help from the European Union and the International Monetary Fund last June seeking about 17.5 bln euros in aid, mostly to recapitalise its banks that suffered great losses in Greece.

Merkel said that there would be no special conditions for Cyprus and that it would be expected to pursue deep reforms including privatisations in return for aid. Outgoing communist president Demetris Christofias is opposed to selloffs of profit-making utilities, such as the telecom operator Cyta and the power generator EAC. Instead, the government tapped into their profits from 2012 to pay civil service salaries, just two months from the next elections.

German media have in the past criticised Cyprus's status as a popular tax haven for wealthy Russians and expressed unease about bailing out the island's banks - an issue taken up by two senior lawmakers in comments published on Wednesday.

"There are many question marks regarding Cyprus. On the basis of what we know so far I do not see a majority (in the lower house Bundestag) for financial aid," Rainer Bruederle, parliamentary leader of Merkel's junior coalition partner, the Free Democrats, told the Bild newspaper.

"If the impression exists that German taxpayers are to be liable for dirty money, the aid would not be manageable or acceptable," Bruederle added.

POLITICAL OPPOSITION

Bruederle's comments came after the German opposition Social Democrats (SPD), who up to now have always supported Merkel's euro zone policy in parliamentary votes, said they could not support a bailout for the island at the present time due to concerns over money laundering.

The centre-left SPD, which hopes to oust Merkel in German elections due in September, has taken a hard line on tax evasion, including by wealthy Germans who squirrel away cash in Swiss bank accounts.

A preliminary bailout accord between Cyprus and lenders leaves open the possibility of privatisations but only if debt levels are unsustainable.

The head of euro zone finance ministers, Jean-Claude Juncker, said last month the ministers would discuss a deal for Cyprus at their next meeting on Jan. 21.

German newspaper Handelsblatt, citing sources close to the negotiations, said on Wednesday that no deal would come before early March, well after the next presidential elections on February 17.

Handelsblatt said euro zone finance ministers prefer to wait to work with the successor of President Demetris Christofias, a communist who is not seeking re-election.