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Cyprus seeks solidarity, not special treatment on aid

Source: Thomson Reuters Foundation - Thu, 10 Jan 2013 11:53 GMT
Author: Reuters
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   * Cyprus says victim of EU decision on Greek debt writedown

   * Island sought EU, IMF aid in June

   * Euro zone minnow resisting calls for privatisations

   * Merkel ally says Cyprus bailout problematic

(Adds German lawmaker comment, edits)

   NICOSIA, Jan 10 (Reuters) - Cyprus branded itself on Thursday a victim of Greek debt restructuring, appealing for solidarity from its EU partners as it struggles to clinch a bailout that chief paymaster Germany seems reluctant to grant.

   Last June, the island became the fourth euro zone state to apply for a financial rescue from the European Union and the International Monetary Fund after its banks suffered huge losses on the EU-approved writedown on Greece's debt.

   Aid talks for Cyprus have been complicated by concerns over debt sustainability because of the size of the potential bailout bill, and German concerns that the island has become a haven for dirty money from Russia. 

   The bailout could reach 17 billion euros, virtually equivalent to Cyprus' entire economic output.

   German Chancellor Angela Merkel said on Wednesday she expected the bailout talks to take time, and said there could be no "special conditions" for Cyprus, implicitly calling for privatisations the island's leftist government has ruled out. 

   She was due in Cyprus on Friday for a meeting of the European People's Party (EPP) - a grouping of centre-right European parties - but was not scheduled to have contacts with the Cypriot government.

   "We never asked for special treatment," government spokesman Stefanos Stefanou said. 

   "What we are asking for is an expression of solidarity - which is a basic EU principle - towards a country which is the victim of a European decision to restructure Greek debt." 

   

   TAX HAVEN

   Cyprus, an island of about 1 million people, has along with Bulgaria the lowest corporate tax rate in the EU of 10 percent, drawing thousands of offshore companies. 

   In the nineties there were widespread reports it was a conduit for Serbian funds siphoned out of former Yugoslavia, and was mentioned in a UN indictment against the country's late strongman Slobodan Milosevic.

   Since then Cyprus has become a popular offshore tax haven for Russian businesses seeking protection from their country's unpredictable investment climate. 

   German lawmakers would not approve aid unless the island conformed to EU rules on transparency, Michael Fuchs, a deputy leader for Merkel's Christian Democrats (CDU) in parliament, said on Thursday.

   "If Cyprus is not ready to adopt EU rules on transparency and money laundering, then there won’t be any aid for Cyprus," he told Reuters. 

   Cyprus says it does conform and angrily dismisses suggestions it isn't vigilant enough to stop suspect activities. This week, its central bank and the finance ministry went on a charm offensive with diplomats, outlining what regulations it has in place to stop money laundering. 

   It adopted legislation in December to tighten controls.  

   

   NO PRIVATISATIONS  

   The island's outgoing government, facing a parliamentary election on Feb. 17, is also resisting lenders' demands to privatise state assets - as well as putting a positive slant on the banking sector's needs to make its eventual debt load manageable.

   In October 2011, EU leaders agreed to impose a valuation discount - or haircut - on Greek sovereign debt holdings. 

   That decision, which was supported by Cyprus's president, saw the island's banks book losses equivalent to about 20 percent of its entire economic output.

   The island, shut out of financial markets for the past 18 months, has been forced to rely on short-term high-yield loans from domestic institutions to meet monthly payments. 

   Recently it borrowed from the state-controlled electricity authority and its telecoms company. Under a draft accord with lenders, these assets could potentially be privatised to ensure Cyprus will be able to pay back any financial aid.

   Cyprus, which is embroiled in a bitter political conflict with neighbouring Turkey after a brief war in 1974 split the island into two, says these are strategic assets necessary for national security. 

(Reporting By Michele Kambas, additional reporting by Andreas Rinke in Berlin; Editing by John Stonestreet)

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