What Does Cyprus Need If It’s Not More Money?

“There is a big misunderstanding about this in the press this morning,” a European Commission official said on Friday. “The Cypriots are asking for help in the form of technical assistance with structural funds absorption which is what we have committed to provide through the Task Force for Cyprus that is being established.”

The confusion began early on Friday morning when Cypriot President Nicos Anastasiades told reporters that he would send a letter to the European Commission and the European Council seeking some form of additional economic assistance. Cyprus’s economy has contracted an average of 0.78 percent each quarter in 2012. European finance ministers are projecting that Cyprus’s economy will contract 9 percent this year and nearly 4 percent in 2014 before returning to growth in 2015, when most of the EU is expected to round the bend.

This contraction compounds austerity measures and asset sales worth nearly twice as much as the 10 billion euros ($13.08) in loans that the nation received as bailout funding last month. All told, the economic situation in Cyprus is grim, and President Anastasiades letter to the European Commission and European Council was aimed at addressing this mid-term outlook.

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However, given the complexity of the entire situation, President Anastasiades announcement misled some members of the press. Some media suggested that Cyprus was going to ask for even more bailout money, which (if true) would have been fairly significant shock. First, the current bailout package was a hard-fought Pyrrhic victory that left neither side truly satisfied…

As Mujtaba Rahman, director at Eurasia Group, told The Wall Street Journal: “There are absolutely no winners from the Cyprus agreement. Every major country and institutional constituency has been hurt, creating the potential for even more toxic and difficult negotiations going forward.” Nobody was looking forward to the circus that would be a renegotiation of the bailout terms.

Second, 10 billion euros was the maximum amount of debt that creditors calculated Cyprus could reasonably absorb. Increasing the value of the bailout could make the nation’s debt problem worse. As it stands, debt is expected to be over 100 percent of GDP in 2013 and to rise through 2015.

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So instead of asking for a larger bailout, Anastasiades is asking about ways to use EU structural funds and other technical assistance to help cope with economic growth in the mid-term. Structural funds are paid out from the EU’s long-term development budget, and has historically been used to bring struggling economies up to par.

“We will try to reallocate structural funds so that we can use them as effectively as possible to support the kind of economic activities in Cyprus that will help the country to return to recovery … for growing and investment and employment,” EU Economic and Monetary Affairs Commissioner Olli Rehn told a news conference.

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