The bailout of Cyprus is under threat after the German parliament threatened to veto the much needed measure and Angela Merkel could be powerless to force it through.
Optimistic rhetoric has been the name of the game for the Eurozone’s leaders over the past few weeks with both the European Commissioner Olli Rehn, Germany’s finance Minister Wolfgang Schauble and European commission president Jose Manuel Barroso all claiming that the worst of the regions problems are over. Not so in Cyprus’s case, for the tiny island nation the worst has yet to come.
Eurozone finance ministers are highly sceptical that the country will be able to keep to the conditions needed to ensure a bailout with several refusing to sign off on a deal until next month’s elections, at which point Europe’s only Communist President, Demetris Chistofias will have to leave office.
According to a German newspaper source; ‘the incumbent Christofias categorically rejects the sale of state companies. Without privatisation revenues the country cannot be reformed.’
Negotiations over the Cyprus aid deal, which could cost as much as €17.5 billion, have dragged on for month’s thanks in part to Chistofias reluctance to agree to deep economic reforms. Concerns have also been raised about the amount of Russian funds Cypriot banks hold. Germany and other nations believe that much of that money comes from criminal activity.
Germany’s Social Democratic party now says it cannot support a Cyprus rescue deal until this is addressed. SPD chairman Sigmar Gabriel told Sueddeutsche Zeitung that:
“As things currently stand, I can’t imagine German taxpayers’ bailing out Cypriot banks, whose business model depends on abetting tax fraud, If Ms. Merkel wants SPD support for a Cyprus aid package; she will have to have excellent arguments. At the moment, however, I don’t see what those might be.”
Cyprus has suffered the knock on effects from the crisis in Greece as many Cypriot banks hold large quantities of Greek debt on their books. Banks in Cyprus hold assets worth some €150 billion ($196 billion) against a Cypriot gross domestic product of just €18 billion in 2011. Currently under discussion is a €17.5 billion ($23 billion) package which, relative to the country’s GDP, would be the euro zone’s largest yet.
The Pound to Euro exchange rate is currently trading at 1.2282
The Pound to US Dollar exchange rate is currently trading at 1.6051
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