Incoming pro-bailout government signals commitment to onerous reforms in return for international rescue package
Cyprus will run out of money in May, its outgoing finance minister has warned, as EU officials prepare to address the issue of a €17.5bn (£15bn) bailout for the island.
The scale of Cyprus's monetary woes hit home as the new president in Nicosia, Nicos Anastasiades, assumed office on Thursday pledging to finalise negotiations for an international rescue programme "as soon as possible".
"Confronting the huge challenges that we face, we want Europe on our side," said the veteran conservative, whose tenure ends five years of left-wing rule widely blamed for the island's worst economic crisis in decades. "We're not asking for special [treatment] but fair treatment … it's what we deserve. Solidarity from Europe. "
Since being swept to power in a resounding victory on Sunday, Anastasiades has gone out of his way to emphasise his commitment to adopting the onerous reforms that are the price of international aid.
Signalling a clear shift from the policies of the outgoing communist government, he appointed the technocrat and former World Bank economist Michalis Sarris as finance minster.
Widely respected in EU capitals and the US, Sarris oversaw Cyprus's entry to the eurozone during a previous stint as finance minister in 2008.
In another deft move, the London School of Economics professor and nobel laureate Christopher Pissarides has also been drafted to head a group of "wise men" advising the government on the economy.
Anastasiades, whose victory has been met with relief in Brussels after eight months of often fraught negotiations under former president Demetris Christofias, says he hopes a loan agreement can be wrapped up by the end of March.
With bankruptcy looming – and just 12 weeks to go before the island faces a debt repayment of €1.6bn – the new president spoke this week of the "pressing need to recapitalise our banking sector". Greek Cypriot banks saw €4.5bn in deposits – the equivalent of 25% of GDP – wiped out virtually overnight when Greece's monumental debt load was restructured last year.
In his last public statement before leaving office, outgoing finance minister Vassos Shiarly said the island's public coffers would run dry in May, leaving the government unable to pay civil service salaries or pensions. "Based on the data before us, fiscal issues can be managed without a problem until May, because we always work three months ahead," he told reporters after a meeting with the new president.
"Like Greece, we need a correction in our attitudes," his replacement, Sarris, told the Guardian. "But in Greece they have been living beyond their means for 40 years and so to correct that in the space of two years is very painful. In Cyprus we are talking about correcting excesses of a much shorter period, so the correction will be relatively mild."
But with bank recapitalisation estimated at around €10bn and government operation costs projected at another €7bn, the financial assistance programme needed for the island will ultimately amount to its entire annual GDP – pushing the island's debt burden to what many fear will be unsustainable levels.
Highlighting those concerns, Moody's noted on Thursday that while the election of the pro-bailout Anastasiades has boosted the chances of a settlement finally being reached, default could still not be ruled out.
"There is a 50% chance that the sheer size of Cyprus's anticipated debt load will eventually compel authorities to pursue every avenue for debt reduction, including private sector losses on Cypriot debt," Moody's said.
With the eurozone debt crisis in its third year, Europe appears divided over how to handle a bailout for the island. Germany, which has borne the brunt of bailing out Athens, has increasingly pushed for bank depositors to bear part of the cost – prompting fears among other member states of a run on Cypriot banks.
In his first speech as president, Anastasiades angrily rejected the idea of Cypriot bank shareholders and depositors being made to pay the price of any rescue programme for the country.
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