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Cyprus Bailout Delayed To March

Eurozone finance ministers are expected to agree to a rescue package for Cyprus at the beginning of March, following the presidential elections, instead of at the end of January as was initially intended.

European Union Economic and Monetary Commissioner Olli Rehn told the European Policy Centre in Brussels on January 11 that eurozone ministers would reach a decision on Cyprus's bailout 'in due course.' However, Luxembourg Prime Minister Jean-Claude Juncker suggested on January 10 that talks between eurozone governments on the bailout terms will last well into February.

Cypriot Finance Minister Vassos Shiarly confirmed at the end of last year that Cyprus is very close to reaching an agreement with international creditors on a multi-billion-euro bailout to save its Greece-exposed economy. However, the latest stumbling block is believed to originate from Germany, where politicians from all parties, but particularly from the Social Democratic Party, have voiced concern over Cyprus's anti-money laundering laws, and are insisting that the Cypriot government continue to tighten anti-money laundering and tax avoidance legislation as a condition of its bailout.

The Cypriot government has been in consultation with other political parties and labor groups to agree to a package of spending cuts and tax measures to secure the rescue funding, which is estimated to amount to between EUR12bn (USD15.5bn) and EUR13bn.

The government hopes to cut its debt by a little over EUR1bn by the end of 2016 as opposed to the troika - the European Commission, European Central Bank and the International Monetary Fund - who have requested a EUR1bn cut by 2015. The government is said to be proposing to reduce its deficit in a ratio of 60:40 expenditure cuts to tax rises, whereas the troika has proposed an 80:20 ratio.

Austerity-driven tax rises have already seen value-added tax jump 2% to 17%, with the government discussing another rise in VAT. Income tax, investment taxes and property tax have also risen.

Cyprus became the fifth euro-zone country to request a bailout, when it was forced to recapitalize its banking system this June. The government has been reluctant to sign a deal that would impose harsh cutbacks and has been supported by French President Francois Hollande, who during a meeting with Cyprus President Dimitris Christofias, urged other European leaders not to impose draconian measures on Cyprus in return for aid.

Troika negotiators have little hope of agreeing satisfactory terms with communist President Christofias, who will not countenance privatizations of bloated state monopolies, and are resigned to waiting for a new, presumably right-wing administration to take power later in February.

 

 

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