Cyprus

Outgoing Cypriot president Demetris Christofias addresses the European Parliament Tuesday.

In this morning’s dead-tree edition of the FT, fellow Brussels Bloggger Josh Chaffin has a report on Cypriot officials launching an offensive to convince other eurozone governments that it is no longer a haven for money laundering.

The effort has included summoning EU ambassadors in Nicosia to the Cypriot finance ministry, where they were given a 23-slide presentation detailing the country’s anit-money laundering efforts. As is our practice here at the Brussels Blog, we’ve decided to post a copy of the report here

Enda Kenny, Ireland's prime minister, during a November EU summit in Brussels

One of the hardest things about keeping on top of the eurozone crisis is the tendency for issues once regarded as done and dusted to re-emerge months later as undecided. In the new year, there are two places where this revisionism will be thrust back into the limelight: Cyprus and Ireland.

In Cyprus, two hard-and-fast principles, long believed sacrosanct, will be tested. The first is eurozone leaders’ long-held insistence that Greece is “unique”, in that it would be the only eurozone country where private holders of sovereign debt would be defaulted on.

With Cyprus’s bailout likely to double the country’s debt levels, officials say debt relief must come from somewhere or Nicosia faces a burden rivalling Greece’s – somewhere in the neighbourhood of 190 per cent of economic output. Haircuts for private bondholders could be one option to lower that, though for the time being Jean-Claude Juncker, outgoing head of the eurogroup of finance ministers, insists it’s off the table.

Which takes us to controversial option two: wiping out senior creditors in Cypriot banks. If creditors don’t need to be repaid, than the size of the bailout can be much smaller. This may appear more palatable to eurozone leaders – after all, about €12bn of the €17.5bn in bailout funding is need to recapitalise Cyprus’s collapsing banking sector – but it would also break unspoken rules. 

Cyprus finance minister Vasos Shiarly, left, with EU economics chief Olli Rehn.

With the Greek government announcing the details of its highly-anticipated debt buyback programme this morning, there really is only one major agenda item offering any suspense at tonight’s meeting of eurozone finance ministers in Brussels: Cyprus.

Brussels Blog has got its hands on the draft deal between Nicosia and the “troika” of international lenders (with the words “contains sensitive information, not for further distribution” on top of each of its 29 pages) that, for the first time, lays out in minute detail just what the Cypriots are being asked to do in return for bailout cash. We’ve posted a copy here.

Senior Cypriot and eurozone officials have cautioned that the whole deal cannot be completed until Pimco, the California-based investment firm, finishes a complete review of the teetering Cypriot banking sector. But the Memorandum of Understanding pencils in €10bn to recapitalise banks.

Considering Cyprus’ entire economy is only €18bn, that’s a whopping sum, equivalent to 56% of gross domestic product – much higher than either the Irish or Spanish bank bailouts.

Which raises a problem: Cypriot sovereign debt is already at almost 90 per cent of GDP. The bank rescue, plus additional cash that will be lent to run the Cypriot government, will take that debt to levels the International Monetary Fund has, in the past, argued is unsustainable

With the European Commission holding its final summer meeting on Wednesday, Brussels goes on holiday in earnest starting next week, with nothing on the formal EU calendar until a meeting of European affairs ministers in Cyprus on August 29.

But if whispers in the hallways are any indication, veterans of the eurozone crisis remain traumatised by last August, when some inopportune comments by then-Italian prime minister Silvio Berlusconi shook Europe from its summer slumber. Indeed, Maria Fekter, Austria’s gabby finance minister, has already speculated on the need for an emergency August summit.

Herewith, the Brussels Blog posts its completely unscientific odds on which of the eurozone’s smouldering crisis embers could reignite into an out-of-control summer wildfire, forcing cancelled hotel bookings and return trips to Zaventem

Demetris Christofias, president of Cyprus

Demetris Christofias, president of Cyprus, at the eurozone summit in Brussels in June

The news of further turmoil in Cyprus is a reminder that Italy and Spain are not the only eurozone members that may soon be forced to seek European Union support.

After weeks of negotiations, the coalition government’s junior partner, the centrist Democratic Party, has broken off talks with the ruling AKEL, led by communist president Demetris Christofias. As of this morning, that has pushed the yields on 10-year Cypriot bonds above 11 per cent. 

Among the more revealing EU-related disclosures in the WikiLeaks trove are not about Washington’s view of the European Union, but rather about how members of the EU view each other.

One of the more colourful dispatches that have come out thus far is an April 2004 account of an otherwise dull Brussels evening event in which a US official was seated at a table with the featured speaker: Chris Patten, the high-profile British diplomat who at the time was the EU’s foreign affairs commissioner.

Labeled “Dining with Chris: Random Thoughts from Relex” – relex is Euro-speak for the foreign policy, or “external relations,” portfolio – the cable offers Patten’s vivid views on everything from Romania (a “feral nation”) to then-Russian President Vladimir Putin (when discussing Chechnya, “Putin’s eyes turn to those of a killer”). 

Fresh off Turkey’s recent national referendum approving constitutional reforms officials hope will move the country closer to EU membership, Ankara’s chief EU negotiator, Egemaen Bagis, was making the rounds in Brussels this week in an attempt to restart the stalled effort. 

The election of Dervis Eroglu as Turkish Cypriot president appears at first sight to deal a severe blow to the latest United Nations-sponsored efforts at solving the Cyprus problem.  But appearances can be deceptive.  There may, in fact, be an opportunity for a breakthrough.  Crucially, however, it will require the involvement of the European Union.

Eroglu, 72, is usually dubbed a “hardline nationalist” in the international media on account of his long-standing commitment to Turkish Cypriot independence.  This is to miss the point that the Turkish Cypriots are economically dependent on Turkey and Eroglu can hardly act in defiance of the government in Ankara.  It is in the Turks’ wider diplomatic interests to bring about a Cyprus settlement.  They have already made it plain to Eroglu that they expect him to behave constructively. 

A potentially decisive moment is approaching in the Cyprus settlement talks that started in September 2008.  Ban Ki-moon, the United Nations secretary-general, is to visit the divided island on Sunday and stay there until Tuesday.  He does not, of course, have the authority to impose a settlement or even seriously to bang heads together.  But what he can do is impress on the Greek Cypriot and Turkish Cypriot leaders that the world is watching them and that a great deal hangs on the outcome of their negotiations.

A sense of urgency hangs over the talks because presidential elections will be held in Turkish Cypriot-controlled northern Cyprus on April 18.  Mehmet Ali Talat, the leftist president who helped revive the effort at reaching a comprehensive settlement more than 16 months ago, looks vulnerable to the challenge of Dervis Eroglu, the nationalist prime minister. 

Next week’s summit of European Union leaders faces an important choice on Turkey.  Should the EU toughen existing measures that are holding up Turkey’s EU accession talks, because of Ankara’s refusal to open its ports and airports to Greek Cypriot traffic?  Or should the EU recognise that this would send completely the wrong message, just when Greek Cypriot and Turkish Cypriot leaders are trying to reach a comprehensive settlement of the long-standing Cyprus dispute?

Precisely because the EU is divided on the Turkish question – the Greek Cypriot-run government of Cyprus wants a strong line, and other countries are split between supporters and opponents of Turkey’s entry into the EU – it seems unlikely that a consensus can be reached in favour of placing additional obstacles in the path of Turkey’s negotiations.