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Cyprus finances in borderline situation: FinMin


09:11, April 09, 2013

NICOSIA, April 8 (Xinhua) -- The state finances of Cyprus have reached a borderline situation and the government may have difficulty in paying the salaries of its employees at the end of April, the island's Finance Minister Haris Georgiades said on Monday.

Cyprus has finalized a bailout deal with international lenders but it is not expected to receive any loan money before the middle of May.

Georgiades told the parliamentary financial committee which is probing into the circumstances which forced Cyprus to enter into a 10-billion-euro (13.0-billion-U.S. dollar) bailout deal with the Eurogroup and the International Monetary Fund that the government will be short of money at the end of the month.

In return for the bailout, Cyprus's lenders imposed an unprecedented haircut on the savings of major depositors in the two main banks, leading businesses to stagnation and making it even harder for the government to raise money by collecting dues in taxes and fees.

Setting out details of the financial situation, the head of the government's accounting department, Rea Georgiou, said it has only 85 million euros deposited with the Central Bank and it will face a shortfall of 160 million euros at the end of April.

"Should the state not be able to raise this amount it will become insolvent," Georgiou said.

A provisional bailout deal was agreed at the end of last November but the former government failed to negotiate final details in the face of upcoming presidential elections in February, in which it failed to elect its candidate. However, it gave assurances that it had made money provisions to see the government through May.

"It was one of the many assurances by the former government which did not materialize," government spokesman Christos Stylianides said.

"The situation is really dramatic," Stylianides added.

Finance Minister Georgiades said that despite this dire situation, the government had no plans to leave the eurozone and seek an alternative way out of the crisis.

He dismissed calls for Cyprus do away with its lenders' conditions, scrap the euro and return to is former currency, the Cyprus pound.

He said Cyprus had no other option but to stick to the provisions of the bailout deal and apply them fully.

"It is time to pay the bill... It is time to correct mistakes of the past and live within our means," said the minister, alluding to lavish spending over the past five years and the building up of the sovereign debt though market loans.

Cyprus was shut out of international markets following repeated downgrading of its rating in 2011 and the government had to turn to Russia for a 2.5-billion-euro loan to finance its operations. It requested bailout from the Eurogroup and the IMF in June 2012 when efforts to obtain further Russian support failed.

"There is no plan B and I want to underline that an exit from the euro would lead to a much bigger loss not only for big bank depositors but for the whole of the economy and the living standard of every citizen would backslide to what it was centuries ago," Georgiades added.

He said that beyond applying the economic adjustment program, which is expected to be endorsed by the Eurogroup at a meeting in Dublin on Friday, the government is preparing a blueprint to encourage economic activity when restrictions of bank transactions are lifted.

In a move to prevent panic withdrawals and an outflow of capital belonging to foreign depositors, Cyprus' lenders imposed limits on capital movement, pending finalization of the forced merger of the two main banks, Bank of Cyprus and Cyprus Popular Bank, also known as Laiki.

Under this arrangement, Laiki was split into a good part and a bad part. The good one involving deposits under 100,000 euros and all assets, was taken over by Bank of Cyprus, albeit along with a crippling 9.2-billion-euro debt incurred by Laiki mostly over the last 15 months in the form of European Central Bank emergency liquidity assistance.

Central Bank Governor Panicos Demetriades told the parliamentary finance committee that an inquiry into the dealings of Laiki will be carried out.

A probe into the banking system by consultants Alvarez and Marsal mainly covered the activities of the larger lender, Bank of Cyprus, but left Laiki almost untouched as it did not look in detail into its dealings in Greece, including the purchase of Greek government bonds shortly before they suffered a write-down of almost 75 percent in 2011.

Demetriades said the inquiry, expected to be completed in the next few months, will also cover the purchase of bonds.

The central banker also said they had handed another parliamentary committee a report detailing outflows of capital of over 100,000 euros in the days preceding the haircut on deposits.

Bank officials working non-stop since Saturday morning were expected to reach a final figure on the loss large depositors will suffer in the process of the Bank of Cyprus' recapitalization by Monday night.

However, Demetriades said the extent to which Bank of Cyprus has been recapitalized will be known by the end of June.

No reasons for the delay were made available, but reports said there are second thoughts on excluding funds of insurance companies and some other funds.

An initial 37.5 percent was taken off deposits over 100,000 euros to go towards the recapitalization of the bank, with another 22.5 percent blocked indefinitely to be used in case more money was needed.

It is being considered to keep the loss as close to 50 percent as possible. (1 euro = 1.30 U.S. dollars)

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