CYPRUS is worried its EU partners could impose prohibitive conditions on any offer of aid, Finance Minister Vassos Shiarly said yesterday.
Speculation is growing that Cyprus, the eurozone's third-smallest economy, could become the bloc's fourth recipient of aid as a deadline looms to recapitalise the island's second-largest bank.
"It's clear to us that, if we did proceed through the EFSF (European Financial Stability Fund), there are certain conditionalities which might not be acceptable to us," Shiarly told Reuters.
"We had the experience of Ireland, and therefore we are a little bit wary in case conditions are applied," he added.
But Cypriot officials have repeatedly said any assistance should not compromise the island's low-tax status which has propped up the island economically for decades.
Popular Bank requires €1.8 billion in fresh capital to meet European regulators' conditions by June 30. If the bank cannot raise the funds privately, the government, itself cash-strapped by its exclusion from international capital markets, will have to step in.
Asked if an EU bailout could be avoided, Shiarly said: "Yes, it’s possible, but I'm not suggesting that it is something that we are trying to avoid." Cyprus was not engaged in discussions with the EU about financial assistance, he said.
The island could not exclude bilateral borrowing either, even though, he said, it was not the "preferred option", but rather a fallback option. Cyprus acquired a €2.5 billion loan from Russia in late 2011, funding which is covering deficit shortfalls this year.
"We will never exclude any possibility so if and when we apply to the EFSF at least we will know that, if we are pressed too hard through the EFSF, we do always have an alternative, if an alternative is available," he said.
With the Greek election on June 17 hanging in the balance, and scenarios mounting about the possible exit of Greece from the eurozone, bankers say that this is discouraging potential investors in Popular.
"That is the single most important factor that is keeping people, strategic investors, funds and others, from investing in the Group," Michael Sarris, Popular Bank's non-executive chairman, told Reuters in an interview.
"They (investors) are comfortable in helping cover the existing capital requirements, but they are not comfortable at the idea that it may end up being a lot more."
Popular has floated the idea of bundling its Greek assets under one of its Greek subsidiaries, which could make it eligible to take part in the recapitalisation planned under that country's financial rescue by international parties.
"We have to sever the Greek operations of the Cypriot banks. The Cypriot banking system has a gangrene. You have to sever the part that is dangerous and grow it again," said economist Stelios Platis.
So far, the numbers show that foreigners aren't worried. Central Bank data for April shows a 0.5 per cent year-on-year increase in total deposits in Cyprus to €71.6 billion. Of that figure, there was a 29 per cent increase in deposits by other eurozone residents.
Of the Cypriot banks, Popular is the most heavily exposed to Greek government debt, though the island's largest lender, Bank of Cyprus used to hold a hefty slice of Greek sovereign debt too, totalling €2.0 billion.
But Bank of Cyprus has whittled down its own capital shortfall of €1.57 billion to just €200 million, and plans to sell two insurance divisions to bridge the rest.
Hellenic seems to be escaping relatively unscathed, holding only €100 million in Greek sovereign debt, which it has already written down.
But economists fret that damage from Greek government debt may be the tip of the iceberg, as Cypriot banks also have up to €23 billion worth of loans outstanding to companies and individuals in Greece.