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Saturday, June 16, 2012

Cyprus faces the choice of a European bailout or a loan from Russia


The Cypriot government is weary of turning to the EU bailout fund due to fears that it might, like Greece, be forced to make painful austerity measures as a condition for the money. Cyprus is particularly afraid it might be asked to raise its 10 percent corporate tax rate, which attracts much foreign business.
Cyprus' left-wing President Dimitris Christofias has repeatedly lamented what he described as Europe's erroneously single-minded focus on austerity at the expense of policies that promote economic growth.
Because of these concerns, the government is again reaching out for a helping hand from Russia, a trusted ally with vested interests in the island's economy.
Russians have billions stashed in Cypriot banks and Russian companies are looking to invest in natural gas exploration off the island's south coast, where a large mineral deposit has already been discovered.
If the country does apply for aid from the European bailout fund, having backing from Russia in the form a loan could strengthen Cyprus' hand in negotiating better terms for the rescue money from its EU partners, the anonymous official said.
Alternatively, Cyprus could use the EU bailout money to recapitalize the banks and the Russian cash to finance the country's public debt and foster growth, he added.
Still, some analysts see a Russian loan as a risky proposition. Nicosia-based economist Michalis Florentiades said that while it would buy Cyprus time to reorder its finances, the country could soon find itself in the same position if it doesn't push through the kind of reforms urged by the EU to restore investor confidence. At some point, Cyprus will have to regain the bond markets' trust in order to tap them for capital.

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