Bailout Bargaining Cypriot Shortfall Irks German Conservatives

Euro-zone finance ministers are set to agree on a bailout package for Cyprus on Friday, but news this week that the country will need to raise an additional 5.5 billion euros has raised new questions. Germany's parliament is likely to approve the aid, but many are calling for conditions to be imposed.

A cafe in downtown Nicosia: Cyprus wrapped up talks this week paving the way for the 10 billion euro bailout from European Union-led lenders.

A cafe in downtown Nicosia: Cyprus wrapped up talks this week paving the way for the 10 billion euro bailout from European Union-led lenders.

The euro-zone finance ministers are meeting in Dublin on Friday to approve a European Union bailout package for Cyprus. The international donors are expected to provide €10 billion ($13 billion) in funds. One billion is to come from the International Monetary Fund (IMF), and €9 billion is to be supplied by the European Stability Mechanism (ESM), the permanent euro bailout fun. Cyprus itself is expected to provide €13 billion after the government confirmed this week that the country would require €5.5 billion more than originally thought.

The new shortfall in the bailout has sparked critical comments among Chancellor Angela Merkel's conservatives in Germany. Though Volker Kauder, who heads the parliamentary group of her Christian Democrats, said he believed the aid package would be approved by Germany's Bundestag next week, a veto could form within the party's economic wing, which has a large number of members, if certain conditions aren't met.

"We will deliberate on the aid package next week in the Bundestag and be able to approve it," Kauder told the daily Passauer Neue Presse. The conservatives could count on the support of the center-left Social Democrats and the Green Party, he added. SPD General Secretary Andrea Nahles also signaled her party's support. The politician praised Cyprus for a last-minute move that shielded ordinary savers with less than €100,000 in their accounts from a one-time levy on bank accounts in the country as part of the bailout package.

'The Financing Shortfalls Are Giant'

However, Christian von Stetten, the chairman of the significant wing of the conservative Christian Democrats representing the Mittelstand, or small- and medium-sized businesses, said that Cyprus still needs to prove that it can finance the additional €5.5 billion it needs on its own. "If that's not possible, then we can rule out the approval of the planned €10 billion bailout by the Bundestag," he said. On Wednesday, Stetten traveled together with a delegation from the Bundestag's Finance Committee to Cyprus. Of the 237 members of parliament with Merkel's Christian Democratic Union, 145 are part of the Mittelstand group.

Cyprus must now raise around €13 billion of its own contribution to the bailout package and is now levying a one-time deposit tax on bank accounts holding more than €100,000. It is also winding down operations at failing banks. Additionally, the country has agreed to increase its corporate tax, previously the lowest in the euro zone, as well as to introduce a capital gains tax. Additional money is to come from the privatization of state-held enterprises. There are also discussions about possibly tapping Cypriot gold reserves.

On Thursday, Nicosia confirmed that the country would require a €23 billion bailout instead of the previously planned €17.5 billion. Following a provisional agreement on the deal by the euro-zone finance ministers, approval is still required by national parliaments, including the Bundestag. Approval next week would allow the first transfer of funds to take place in May.

"The financing shortfalls are giant and confirm the doubts I expressed in March over the financial tableau agreed to by the troika (comprised of the IMF, EU and European Central Bank)," Stetten said. "Here we go again, just like Greece, where new financing shortfalls come to light time and again."

Draghi Defends Cypriot Central Banker

Meanwhile, European Central Bank (ECB) President Mario Draghi sent a stern letter to Cypriot President Nicos Anastasiades defending the country's embattled central bank governor, Panicos Demetriades, who is under fire for his handling of the crisis. The investigation could ultimately lead to his firing or resignation, but Draghi noted that any such firing could violate EU law.

"As you know, any decision to remove a governor from his duties is subject to judicial investigation by the European Union court," he wrote, according to the Wall Street Journal. Draghi warned that he could only be fired if found incapable of conducting his duty or judged guilty of serious misconduct. "In the absence of such serious allegations, any attempt to elicit evidence against a governor as a means of putting pressure on him would jeopardize the governor's statutorily protected independence," Draghi wrote.

dsl -- with wires


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