29 May 2015 Can the bailout buffer fund a Cyprus solution?

In a recent column Alexander Apostolides suggested that the international community could support a solution of the Cyprus problem if the two communities’ biggest creditors wrote off debt.

That would be Turkey for the Turkish Cypriots and the troika lenders – the European Support Mechanism (ESM) and the International Monetary Fund (IMF) for the Greek Cypriots.

Greece has made talk of debt write-offs somewhat toxic these days, however, so maybe there is a more palatable way of approaching it.

The credit rating agency, Fitch Ratings, said in April that it expected the “buffer” in the Cyprus bailout programme – the amount unused from the €10bn originally set aside – to be around €3 billion. I have also been forecasting a substantial buffer in my monthly reports for some time.

Around €1bn comes from the fact that the cooperative recapitalisation cost €1.5bn instead of the €2.5bn envisaged. The rest comes from the government cutting the budget deficit faster than expected, which also cut financing needs.

Imagine if that €3bn could be directed to the initial upfront costs of a solution of the Cyprus problem.

These costs will include the rehousing of people living in the ‘areas subject to territorial adjustment’ (territory coming back to Greek Cypriot control), infrastructure investment such as bringing modern telecommunications to Varosha or bringing the port of Famagusta up to EU standards.

It might also be used for property compensation but in a future article I’ll go into why that might not be the best use of the money.

The benefit of using the “bailout buffer” is that this money has already been through the difficult political process of approval. It is far easier to vote for a redirection of funds that have already been pledged than to try and squeeze new money out of a bailout-fatigued EU.

There could also be guarantees from triple-A rated banks like the European Investment Bank (EIB) or the European Bank of Reconstruction and Development (EBRD).

Or they could take stakes in major projects. This attracts other major investors by reducing risk perceptions.

These tools would be far more effective than a donor conference. In 2004 Cyprus received pledges of only $400m from the US and €259m from the EU and history suggests that only a tiny percentage of donor pledges are ever met.


*Update: Seems that the European Commission has already rejected the idea. In an interview wtih the Cyprus news Agency on 3 June the EU Economic and Affairs Commissioner said the following (source CNA):

As to whether the programme`s buffer could be used for funding the solution of the Cyprus problem, Moscovici said the European Commission is closely following the talks between President Anastasiades and the leader of the Turkish Cypriot community “and we find that it is encouraging that the talks resume.” Expressing hope for “a sustainable solution to the long-lasting division of the island will be found,” Moscovici added that the Commission “stand ready to support the two communities in their efforts in this direction.” But he said that the solution should be separated from the economic adjustment programme.

“The programme was designed to support the country`s efforts to adjust and rebalance the economy and the financial envelope attached to the programme is therefore used to support this economic adjustment and recovery and not for other purposes.

We will see what kind of needs will emerge from positive talks but solution must first be political and then we will see,” he said.