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Euro ministers back 10 billion euro Cyprus bailout

A child tries to reach an ATM machine at a branch of Laiki Bank in Nicosia March 30, 2013. REUTERS/Bogdan Cristel
A child tries to reach an ATM machine at a branch of Laiki Bank in Nicosia March 30, 2013. REUTERS/Bogdan Cristel

By Jan Strupczewski and Annika Breidthardt

DUBLIN (Reuters) - Euro zone finance ministers backed a 10 billion euro bailout for Cyprus on Friday and the European Commission said it would try to help the island's economy grow again with better use of EU structural funds.

The ministerial support opens the way for several euro zone countries, including Germany and Finland to seek approval for the three-year bailout in national parliaments, so that loan agreement with Nicosia can be signed by April 24.

The first tranche of the loan - 9 billion of which will come from the euro zone and 1 billion from the International Monetary Fund - will flow to Nicosia in mid-May.

The euro zone loans will have an average maturity of 15 years and maximum maturity of 20 years.

"The Eurogroup considers that the necessary elements are now in place to launch the relevant national procedures required for the formal approval of the ESM financial assistance facility agreement for an amount of up to 10 billion euros, subject to IMF's contribution," the euro zone ministers said in a statement.

To cover its financing needs over three years, Cyprus itself will have to come up with 13 billion euros of its own, with the bulk of that sum coming from the closure of its Laiki bank and the restructuring of the Bank of Cyprus.

The amount that Cyprus would need to contribute on its own had been estimated a month ago at around 7 billion, but the two sums were not directly comparable, EU Economic and Monetary Affairs Commissioner Olli Rehn told a news conference.

"People have been comparing apples with pears and coming up with oranges," Rehn said.

"If you look at these two figures of 17 billion ...and the 23 billion for program financing, they are ... not strictly comparable because the construction of the first and second, or final package are different," he said.

"The 17 billion euros is related to net financing needs ... while the larger figure, 23...is a gross financing concept," he said. The larger number also includes additional buffers to allow for weaker fiscal developments and additional costs in banks, he said.

Cyprus will also raise taxes, cut spending and implement structural reforms to improve its public finances and to be able to eventually repay its debt, that is to fall to 104 percent of GDP in 2020 from a peak of above 126 percent in 2015.

"The Eurogroup is confident that determined action in line with the reform measures spelled out in the MoU will allow the Cypriot economy to return to a sustainable path based on sound public finances, balanced growth and financial stability," the statement said.

But international lenders now forecast the Cypriot economy will contract almost 9 percent this year and almost 4 percent in next year before returning to weak growth in 2015 and 2016.

Cypriot President Nicos Anastasiades appealed to European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy to do more to help revive growth in Cyprus, possibly through the use of the EU's structural funds.

Such funds are paid out from the EU's long-term budget to all of its underdeveloped regions to co-finance projects with national authorities that help them expand and bring their wealth to the EU average.

"We will try to reallocate structural funds so that we can use them as effectively as possible to support the kind of economic activities in Cyprus that will help the country to return to recovery ... for growing and investment and employment," Rehn said.

The flow of such funds is spread over the seven years of the EU budget, but can be accelerated to increase the amount of money in the earlier years at the cost of the outer ones -- this method has been employed to help Greece already.

(Additional reporting by Luke Baker in Brussels; editing Jeremy Gaunt)

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