Troika inspects Cypriot books

Tue, Jul 3, 2012, 01:00

Potential creditors from the IMF, EU and ECB started trawling through Cyprus's finances today to assess how much emergency aid the recession-hit euro zone minnow may need after being hammered by exposure to Greece.

Two teams from “the troika” met separately with the Central Bank and finance ministry on today, officials from both institutions said.

Cyprus sought a financial lifeline from EU rescue funds last week to help support local banks crippled by their losses on Greek bonds.

The total amount Cyprus may require is still unclear, but it faces a virtually guaranteed bill of €2.3 billion for its two main banks. There is speculation the bailout could cost as much as €10 billion - more than half the size of Cyprus's economy.

Cyprus's finance ministry said the troika would also meet with labour and employer groups and management teams of the largest credit institutions.

"This visit is purely exploratory in nature and there will be no negotiation or discussion of (economic) measures," the ministry said in a statement.

Cypriot authorities say the island's low-tax status, which has attracted thousands of foreign companies, will not be part of negotiations.

But other issues, such as a public payroll representing 33 per cent of annual state spending and wage indexation blamed for second-round inflationary effects were expected to be in the troika's sights.

In a report last year, the IMF said Cyprus needed to make spending cuts and contain a public sector wage bill which, at 15.4 per cent of GDP, was the highest in the euro zone, it said.

Any troika recommendations would be a delicate balancing act because of the potential dangers of enforcing austerity during a recession, economist Fiona Mullen said.

The Cypriot economy, which represents 0.2 per cent of the euro zone, has recorded negative rates of growth for the past three quarters.

Cyprus is also struggling with record high jobless rates of 10.8 percent. That was reflected by a 9.5 per cent jump during 2011 of its "social transfers" bill, which includes unemployment benefits.

"I'm sure that with figures like this government finances are doing worse," Ms Mullen said. "It is therefore important that they come to an agreement with the troika very fast."

The IMF and EU mission ends on June 6th.

Separately, there are reports today that Slovenia is headed toward becoming the sixth euro-area nation to seek a bailout as faltering banks strain its finances.

The nation, which adopted the euro in 2007, is assessing the fiscal burden of covering the liabilities of its financial industry after Nova Ljubljanska Banka, the largest bank, got a capital boost.

Prime minister Janez Jansa, who said on June 27th that Slovenia risks a "Greek scenario," told reporters two days later in Brussels that the government was "doing everything to find a solution" and avoid the need for assistance.

"It's increasingly likely that Slovenia will be the next small economy asking for a European Union bailout, which would be focused on the banking sector," said Michal Dybula, an economist at BNP Paribas SA in Warsaw.

Agencies