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Broke Cyprus hopes to ride euro crisis as EU head

Charlie Charalambous
A picture from the Cypriot Press and Information Office (PIO) shows President Demetris Christofias giving a press conference in April 2012. By a cruel twist of fate Cyprus is poised to take the chair as EU president tasked with guiding Europe out of financial chaos just as it becomes the fifth eurozone state to seek a Brussels bailout.

By a cruel twist of fate Cyprus is poised to take the chair as EU president tasked with guiding Europe out of financial chaos just as it becomes the fifth eurozone state to seek a Brussels bailout.

Cyprus has the unenviable tag of being the first country to hold the six-month rotating presidency -- from July 1 -- while negotiating European Union emergency aid.

Nicosia has waited eight years -- since joining the EU in 2004 -- for its chance on the bigger stage but now all the talk is about stemming debt contagion not the presidency.

Officials from the European Commission, the IMF and the European Central Bank are expected to arrive on the island on Monday to assess the situation of the banking system and any other fiscal requirement the government needs.

Negotiations will set the amount Cyprus needs as well as spell out the reforms it will be required to carry out in return.

And it has not gone unnoticed that a country that now takes over the job of securing agreement on Europe's budget financial framework waited until it ran out of options before requesting help.

Financial analyst Fiona Mullen told AFP the timing of the bailout request on June 25 only sharpened the world?s gaze on the Mediterranean island?s economic plight.

"That the government waited until the last minute to apply for a bailout highlighted the fact Cyprus is in trouble and put the presidency in focus. If it had applied earlier it would have avoided world attention."

She said Cyprus was now in an awkward position when it comes to handling Europe?s creaking economy, placing Nicosia in a weaker position when negotiating the EU budget.

"It would be embarrassing for any country to hold the EU presidency when asking its partners for money."

Mullen believes the terms of the bailout will be tough because the government has dragged its feet in introducing additional measures to curb public spending and bolster state revenues.

Cyprus already needs to make 200 million euros ($252 million) in further tax increases and savings to ensure its budget deficit falls below the EU-permitted 3 percent of GDP, from 6.3 percent in 2011.

Although the government is adamant its cherished 10 percent corporate tax rate is not up for discussion in bailout talks, EU officials will seek public sector cuts, reform of index-linked salaries and tighter supervision of cooperative banks, said Mullen.

Soviet-educated President Demetris Christofias from the communist AKEL party is still chasing a loan from either Russia or China as insurance against harsh EU bailout terms.

When asked about the issue in Brussels on Thursday, he said: "Why not? It is not a sin, allow me to say, to have assistance from the EU and at the same time help from Russia or China."

Cyprus, the 17-nation eurozone's third smallest economy, now has Europe twitching over possible contagion spreading across the single currency block.

The island was undone by its disproportionately large banking sector which is heavily exposed to debt-paralysed Greece, and a huge write-down of Greek bonds pushed it to seek help.

Cyprus follows Greece, Ireland, Portugal and Spain in formally asking for aid as it takes on the presidency.

For weeks if not months the government gave the impression it was doing everything possible to avoid going cap in hand to the EU.

And economist Costas Apostolides says the government is right to persist in securing a foreign loan even if it could have handled the situation in a more timely fashion.

He blames the international credit agencies for using flawed logic in demanding austerity while the Cyprus economy is in a downward spiral.

"Fundamentally a country in recession doesn't make cuts to the budget and make balances when the economy is going down. It's impossible to do that," Apostolides told AFP.

"The credit agencies have got it wrong ... It's stupid economics."

Cyprus has been unable to borrow from international markets since 2011 after being reduced to junk status by two of the three international credit agencies.

Fitch followed suit on Monday forcing the government's hand in requesting emergency assistance.

Cyprus avoided having to apply for EU aid by securing a 2.5 billion euro Russian loan in 2011 to cover debt refinancing for this year.

Analysts say the amount that needs to be injected into Cyprus?s ailing 17.3 billion euro economy could be as high as 10 billion euros.

At the very minimum, the government needs to find a combined 2.3 billion euros to recapitalise the island's two largest banks -- Popular Bank and Bank of Cyprus -- against a worsening of the euro crisis.

And Apostolides said there is no shame in Cyprus using the eurozone bailout mechanism.

"Cyprus is one of five states that have asked for assistance and the support mechanism is there to deal with a crisis that affects member states, so what's the problem?" said Apostolides.

He said the government was doing the right thing by pursuing a foreign loan as it reinforces Cyprus's bargaining position for more favourable bailout terms.

"Strength in bargaining derives from having a second best option which means you can walk away from the first without having to give in."

Finance Minister Vassos Shiarly has tried to allay fears that the terms of the bailout will be harsh for Cypriots already suffering the effects of tax hikes, wage cuts and record unemployment of more than 10 percent.

Cypriots are worried they must stomach the same bad medicine endured by close neighbour Greece.

Official figures show the island's economy fell deeper into recession in the first quarter of this year, shrinking 1.6 percent year on year.