ALREADY in February the previous administration knew that an exclusively taxpayer-funded bailout of Cyprus was never on the table, but a bail-in was.
Daily Politis revealed yesterday a European Commission paper communicated to the government on the eve of the general elections.
The paper, tagged ‘strictly confidential’, outlines the programme options for debt-ridden Cyprus which in June 2012 had asked the EU for financial assistance. It lists three options, none of which include a bailout.
In the introduction, the paper makes it clear that it rules out a bailout of the Cypriot state: “The due diligence exercise carried out by Pimco has confirmed that the Cypriot banks have large capital needs (around €10 billion, or 60 per cent of GDP). If the costs for recapitalization are fully born by the state debt will rise to around 145 per cent in 2014, raising concerns about debt sustainability.”
Rather, two of three scenarios it lists involve a bail-in in one form or another.
The first option – the one which was later agreed at the March Eurogroup – envisaged a full bail-in (‘fast deleveraging’). In this scenario, junior debt holders and uninsured depositors of the two biggest banks were to be fully bailed in.
The paper also describes the drawbacks of each option. On the full bail-in, it notes: “There is a significant risk that the bail in option will result in the imposition of deposit withdrawal restrictions and capital controls by Cyprus. This could have a very negative impact on the financing conditions for other peripheral countries.”
The second alternative was a partial bail-in (‘moderate deleveraging’) where “junior debt holders will be fully bailed in. Depositors will not be bailed in, but will pay additional taxes.”
A third way, which the Commission called “a financially and economically sounder option,” would be to allow Cyprus to sell the shares it will acquire in the banks to the European Support Mechanism (ESM) once the direct recapitalisation instrument became available.
Under this scenario, “Cyprus may apply for direct capital support from the ESM. This would allow the Troika to assume that before the end of the programme (2015), the debt of Cyprus would be reduced by €3.5 billion (- 20 per cent of GDP).”
According to Politis, the Commission’s paper was handed to the previous AKEL administration a few days before the presidential elections. It’s not clear whether the document was relayed to the new DISY government once it took office, weeks before the crucial Eurogroup meetings.