Pressure for a Deal: Berlin Opposition to Cypriot Aid Weakens

Cyprus: The home of palm trees and euro-zone debt. Zoom
AP

Cyprus: The home of palm trees and euro-zone debt.

German leaders are concerned that emergency euro-zone aid to Cyprus will merely serve to help the Russian oligarchs who use the island nation as a tax haven. With pressure growing to approve a bailout deal, however, Berlin now appears to be changing its tune.

German Finance Minister Wolfgang Schäuble, as he has made clear several times, is no fan of providing emergency aid to struggling euro-zone member Cyprus. But pressure to reach a bailout deal has been growing in recent weeks. And now, according to an article in the daily Süddeutsche Zeitung, Berlin appears to be abandoning its resistance.

Citing unnamed government sources, the paper noted that pressure to reach a deal on Cyprus had grown from euro-zone member states, the European Commission and the European Central Bank. There is concern in Brussels and across Europe that were Cyprus to be allowed to slip into bankruptcy, it could reverse the recent progress that has been made in coming to terms with the euro crisis.

Still, the bailout is not without risks. Cyprus is in urgent need of up to €17.5 billion ($23.6 billion) in emergency financing, primarily to prop up its ailing and outsized banking sector. But a bailout of that size would be roughly equivalent to the country's annual gross domestic product and would increase the island nation's sovereign debt load to a potentially unsustainable level. The International Monetary Fund had even demanded in December that the aid package be paired with a significant debt haircut.

There have been recent indications that the final bailout price tag might ultimately be lower. For one, Nicosia has said that its banks do not need as much help as had originally been estimated. For another, the Associated Press reported on Tuesday that Russia will very likely take part in the bailout package, lessening the burden on Europe.

Money-Laundering Concerns

The reasons for Russian involvement and German reluctance are the same. Cypriot banks have long been a haven for Russian oligarchs looking for a low-tax location to park their riches. One of the results is a bloated banking sector with assets worth some €150 billion, vastly greater than the country's economic output. More to the point, however, are concerns in Berlin that Cyprus has been weak in battling money laundering.

Nicosia has vociferously denied charges that it doesn't do enough to combat money laundering, and has also recently agreed to closely examine potential reforms to shore up weaknesses. The country has also undertaken several reforms so as to qualify for European aid, and has not tired of pointing out that much of its troubles are the result of the Greek debt writedowns last year.

"I think the attitude will change and we will receive the financial assistance we are seeking," Cypriot Finance Minister Vassos Shiarly told the Associated Press in an interview this week. "We are not asking for a gift. We're asking for a loan on the reasonable terms which have been offered to other member states."

Parliament to Have its Say

According to Wednesday's Süddeutsche report, German Finance Minister Schäuble remains opposed to the bailout package. But he appears to be increasingly isolated in Europe. Last week, he was taken to task by European Central Bank head Mario Draghi for his contention that Cyprus was not "systemically relevant," or big enough that the country going bankrupt would seriously threaten the rest of the euro zone.

Still, Schäuble isn't the only one in Berlin with his doubts. The Cyprus bailout, once it is agreed to by European finance ministers in Brussels in the coming weeks, must also be rubber-stamped by German parliament. And that, particularly with a general election coming in September, is no longer a foregone conclusion. Chancellor Angela Merkel's coalition partners, the business-friendly Free Democrats, have voiced significant skepticism of a Cyprus bailout and could see a no vote as a way to sharpen the party's extremely dull profile.

There are also several rebels within Merkel's own Christian Democratic Union (CDU) who are likely to vote no. Christian von Stetten, chairman of the CDU parliamentary caucus that advocates for small- and medium-sized businesses, said he would oppose an aid package for Cyprus if it came to a vote. "Cyprus applied for aid seven months ago, and since then it has been staying afloat with payments from the Central Bank of Cyprus," Stetten told SPIEGEL ONLINE. He added that the country's actions since then have been carefully scrutinized, and that "if a majority decides to transfer money to Cyprus from the bailout fund, I wouldn't be able to understand that." He said he would vote against any motion to grant Cyprus aid in parliament.

Potentially most serious, however, is that the opposition Social Democrats, struggling in their own right to attract attention from German voters, have indicated that they are no longer willing to simply follow Merkel when it comes to major euro-zone bailouts.

Talks, though, are continuing. On Thursday, Finance Minister Vassos is scheduled to travel to The Hague for talks with new Euro Group head Jeroen Dijsselbloem. Anti-money laundering measures are likely to be high on the agenda.

cgh -- with wire reports

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