Cyprus in the vestibule of the Support Mechanism

This is because Laiki, due to the behavior of its previous administration (but also the tolerance of various influential people), is on the verge of endurance, mainly due to the loans that were wrongly given in Greece.

In order to save Laiki, the credibility of the Republic of Cyprus must first be restored, as it is not convinced that it wants to take the necessary measures to correct the distortions in the economy. High-ranking officials of the Ministry of Finance, as well as government officials, recognize this problem, as "K" is able to know. That is why the deliberate obstruction of the government regarding the taking of measures, but also around the promotion of the Constitutional Regulation that will implement the obligations of the Republic in relation to the budget deficits, based on the Fiscal Pact, is rather suspicious.

However, AKEL party officials have commented that a deeper crisis, for which the banks "and their own" are responsible, and which will be supported by a relevant "investigation" by the Central Bank, may be the only way to to overturn the prescribed scenario in view of presidential elections. Despite these comments, the possibility that the government's stance on pushing the country into a Mechanism is deliberate is rather far-fetched, as no one believes that the Left would want to destroy Cyprus solely because of a predetermined electoral defeat. And this, despite the comments that are heard, perhaps naively, from people who are very close to the decision-making centers of the government.

Last week, it was leaked by unions that the government is considering cutting the 13th salary, with the aim - according to government officials - of "cutting off" any discussion on the 13th salary before consultations begin. At the same time, however, Vassos Siarlis refused to comment. He is said to have commented that "everything must be on the table" in order not to rule out in advance any options in cutting state spending. With this move, which was fully supported by the President with statements by Stefanos Stefanos, an economically good choice was removed from the table, and with it the government lost a strong "threat" to the unions.
Thus, the position of the government in the whole effort to take the necessary measures to save the situation and Cyprus to avoid the Mechanism was weakened.

The history…
Laiki's strategy for solving its problems revolves around the "isolation" of the bank's bad assets from the sound assets of its portfolio. That is why the effort was focused on the selection of its subsidiary in Greece, IBG, which is intended to be transformed into an "asset restructuring bank" ("bad bank"). Such a move would lighten the books of Laiki, while it would make it much easier to find investors.
In order for this to happen, however, IBG will have to recapitulate and "buy" problem loans and bonds from its parent company, at a discounted price. The move will require 1,5 to 2 billion euros, so the only way to find the resources is the inclusion of IBG in the bank rescue program that has been prepared for Greece and from which half the payments have already been made (25 billion. euro).

With Cyprus on the brink of the Mechanism, however, the Greek government and the Bank of Greece had some objections, since the inclusion of Laiki in the rescue program, since this move was considered futile: If Cyprus finally joins the Mechanism, then the IBG's involvement in the rescue will not allow Laiki to find investors and the money devoted to it will be wasted.
After many behind-the-scenes moves, and despite the objections of Papadimos and Provopoulos (which were also related to the messages sent by the succession to the Central), Laiki's request was finally accepted, with the Troika looking at the issue very "warmly".

Thus, the whole issue reached the stage of preparation for the "big traffic" in IBG. The move predicts big losses for Laiki, which, however, will be "once and for all", while a significant part of the losses already appear in the bank's books. At the same time, a drastic reduction in operating costs is planned, according to information.

IMF objections
However, despite the agreement of the Troika, which was reached with the relevant opinion of the European Central Bank (ECB), the International Monetary Fund began to express objections - these objections are related to the recent trip of Sarri and Orphanides to Washington .
The IMF considers such a rescue somewhat untenable, especially if it is part of Cyprus' attempt to avoid the Mechanism. In addition, the IMF's objections focus on the fact that the international organization considers that the Cypriot economy needs reforms and fiscal correction, regardless of the course of the banks. The economic environment in Cyprus, it is noted, is out of balance and the IMF has a consistent policy of not rescuing banks operating in troubled economies, unless substantial measures are taken to correct the general problems.

For this reason, the rescue of Laiki by the Troika "passes" through the adoption of reform measures in the Cypriot economy, something that the Minister of Finance, Vassos Siarlis, also indirectly but clearly noted, stating that the most important issue is the immediate restoration of the lost credibility of Cyprus, which results from the delay in taking measures. These are very well known to the government.

Endogenous problems
In the meantime, it should be noted that Laiki is the most direct link between taking measures for fiscal consolidation and joining the Mechanism, but it is not the only one. There are many analysts - but also technocrats in Brussels - who consider the inclusion of Cyprus in the Mechanism inevitable and possibly even legitimate.

The management of the public debt has been in a process of tightening for a year and a half, with the short-term debt constantly needing refinancing, a fact that increases both the cost of servicing the obligations of Cyprus and the risk of managing the obligations of the Republic. This situation can not be judged as sustainable, since Cyprus, by excluding itself from the markets and increasing its debt returns, can no longer borrow from the domestic market. Moreover, if the requests of the Ministry of Finance to the European Central Bank for the purchase of Cypriot bonds and for a reduction of the discount on the liquidity of the banks are not accepted, then Cyprus will hardly be able to manage the whole situation.

Given these data, but also given the strong pressures that exist regarding the management of the liquidity of the state, it should not be considered that, if the problem of Laiki is solved, then any risk for joining the Mechanism is removed. Although the solution of the Laiki issue may be an absolute condition for avoiding the Mechanism, but in case no measures are taken to consolidate public finances, then it will not be enough.

Source: KATHIMERINI