Instead of going cap in hand to the European Union for a bailout the second smallest economy in the Eurozone has instead turned its gaze to Russia after the nation bailed out the struggling island last year. By dealing with the Russians the Communist Cypriot government is hoping that it will not have to sign up to the draconian austerity measures imposed by Europe in exchange for the cash.
Efforts were underway to borrow from a third country with “more favourable terms”, Haravghi, the mouthpiece of Cyprus’s ruling AKEL Communist party, reported in a front-page headline. Asked whether the prospect of bilateral lending was distant, Finance Minister Vassos Shiarly told state TV in an interview on Tuesday night; “I would say not.”
The Cypriot government has repeatedly expressed its concerns over the attached strings to any bailout from the EU. Its main concern is that it could be forced to lose its 10% corporate tax rate.
The island has been shut out of capital markets for more than a year and must find the equivalent of 10 percent of its GDP by June 30 to recapitalise Cyprus Popular Bank, if no private investor comes forward. In addition to being hit by the turmoil in Greece, the island has also been badly affected by an explosion last year which put a key power plant out of action.
The decision has raised some eyebrows amongst its European partners; especially as Cyprus is due to assume the European Union presidency next month.
Cyprus has suffered greatly thanks to its close ties to Greece and the ongoing economic disaster that continues to be the Greek economy. The islands banks are in desperate need of recapitalisation and the financial credit agency Moody’s downgraded the Bank of Cyprus. The island is looking for a deal before the weekends Greek elections to avoid any fallout from the result.
The fact that Cyprus is looking elsewhere for assistance could be seen as a sign that several EZ members are losing faith in their European partners. The Spanish bailout has already proven to be a disaster as markets come down heavily on Spain and doubts remain over where the funds are coming from and the actual details of the agreement.
It could be that in the future struggling European banks decide to side step the EU entirely and instead ask for help from the likes of Russia and China, expanding those nations influence deeper into Europe. Such deals are sure to have some strings attached but probably not as severe as the ones being imposed on Greece and Portugal.
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