Cyprus central bank chief rules out debt haircut

Panicos Demetriades said Tuesday that talk of a Cypriot debt write-down — or “haircut” — similar to that made by Greece shouldn't even be taking place. In Greece's case, private sector investors were forced to take losses on their holdings of Greek government bonds, a step that the other 16 eurozone countries insisted would remain a one-off for fear of scaring away investors.

“Haircuts of any kind will not help,” Demetriades said in an interview. “Discussions undermine the prospect of recovery and threaten the stability of the euro area, not just Cyprus.”

Cyprus is asking for a bailout from its fellow eurozone states and the International Monetary Fund because its banks have taken on huge losses on bad Greek debt and loans. The Cypriot government cannot afford to rescue them on its own.

Demetriades said that Cypriot banks will need at worst “less than 10 billion euros (US$13.33 billion)” in rescue money, less than some had forecast recently.

Debt inspectors are now working on a report to determine the exact amount that Cypriot banks will need to replenish their capital buffers. The sum will help determine how much in rescue loans the Cypriot government will get.

The problem is that if the banks require the full 10 billion euros — a figure more than half the country's 17.5-billion-euro (US$23.32 billion) gross domestic product — the government may be overwhelmed by the rescue loans it will have to pay back.

If the debt is deemed unsustainable, the country would have to take tougher measures to solve its financial problems, such as deeper cuts to salaries and more tax increases.

Demetriades said he “doesn't share those gloomy scenarios” because they are based on worst-case assumptions of a deepening recession in Europe and beyond that he says have little chance of happening.

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