World Review | Cyprus election paves way for eurozone bailout

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Cyprus election paves way for eurozone bailout

Cyprus election paves way for eurozone bailout
Cyprus' new President Nicos Anastasiades celebrates his victory (photo:dpa)

EUROZONE leaders hailed with relief the election of veteran rightwing politician Nicos Anastasiades as the new President of Cyprus.

He is a politician with a majority who wants to conclude a deal on the eurozone’s next rescue package - an austerity programme in exchange for a 17.5 billion euros bailout.

Mr Anatasiades, 66, won a landslide victory with 57.5 per cent of the vote in the second round of elections, on February 24, 2013. He defeated his Communist Party (AKEL) rival Stavros Malas who took 42.5 per cent.

Greek-Cypriot Mr Anatasiades, leader of the Democratic Rally Party (Disy), is highly committed to conclude agreement on an austerity programme with the Troika - the European Commission, European Central Bank and International Monetary Fund - to secure a bailout for the island’s economy. This would end the island’s worst crisis in decades.

The new president’s economic team is likely to increase European and international confidence in the new administration with the crucial post of Finance Minister going to Cyprus Popular Bank governor, Michalis Sarris. Mr Sarris held the same ministerial post in 2008 when Cyprus joined the eurozone.

Nobel economics prizewinner, Christopher Pissarides, heads the Council for Fiscal Policy, a new department to oversee the government’s growth plans and implement reforms and austerity.

Negotiations on the bailout are expected to be tough despite the positive attitude of EU leaders to Mr Anatasiades’ election victory.

Cyprus’ current financial problems emerged from the island economy’s reliance on banking and its close financial ties to Greece.

The former British colony, which won independence in 1960, faced financial meltdown following huge banking losses when Greece restructured its debt.

Former Cypriot president communist Dimitris Christofias was at first reluctant to ask the Troika for economic help because he was unwilling to impose tough austerity measures and structural changes on the island economy.

He turned instead to Russia and China for help but they declined. He finally applied to the Troika for a 17.5 billion euros bailout loan eight months ago, but the talks have dragged on.

Cyprus’ is the eurozone’s third smallest economy.

ECB board member Joerg Asmussen warned in January 2013 that Cyprus’ economic problems may derail the entire eurozone.

Austerity measures were introduced in Cyprus in December 2012. Civil servants' salaries were cut by 10 per cent, value added tax increased and cost of living allowances suspended.

The result has seen the budget deficit reduced from 6.3 per cent to five per cent of GDP, despite the economy shrinking.

But analysts say the debt is likely to reach 140 per cent of GDP by 2016 - a level deemed unsustainable by the IMF.

Claims that Cyprus is a hub for money laundering and a tax haven are a prickly issue which will also feature in the forthcoming negotiations.

Cypriot banks have systematically attracted Russian investors and depositors which has led to suspicions - especially from Germany - of money laundering.

Russian Prime Minister Dimitry Medvedev said in January that Russia could support Cyprus under certain conditions. Experts say that Russia may be willing to grant an extension to its five-year loan of 2.5 billion euros made to Cyprus in 2011.

Mr Anastasiades will proceed to privatise the state-owned electricity and telecommunication companies as well as the Cypriot ports. The Cypriot electricity authority alone has insured assets of about two billion euros.

This is the first time, since the occupation of the northern part of the island following the Turkish invasion in 1974, that the problem of Cyprus and its relations with Turkey has not featured as a main topic in the elections.

Mr Anastasiades has appointed Yiannis Kasoulidis as his Minister of Foreign Affairs in a clear indication that he is prepared for serious talks with the Turkish Cypriots and Ankara on reunification of the island. But the exploitation of natural gas deposits next to Israel - an area where Turkey claims to have legitimate rights - may lead to escalating tensions.

Costas Iordanidis

Costas Iordanidis is a journalist and a political and diplomatic commentator for Kathimerini, a Greek daily newspaper based in Athens. He was a founding member of the Greek Institute for ...

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