Cyprus's newly elected president wants an "earliest possible" bailout for the debt-riven holiday island republic but his desire may hit a wall at the EU and the IMF, keen to avoid a replay of Greece.
"Cyprus. It's a pebble in a shoe. It's small but annoying, and in the end it could keep you from walking," said a European diplomat, who spoke on condition of anonymity.
Despite the election victory of pro-European Nicos Anastasiades on Sunday, the equation remains complex for the Mediterranean island that wants to get a 17 billion euro ($22.3 billion)loan from its eurozone partners and the International Monetary Fund, equal to the size of its economy.
Welcoming the election results Monday, Germany and France urged the new government to negotiate a bailout before the end of March, but that goal appeared uncertain.
Before reaching into their pockets, the European Union and the IMF want guarantees on the viability of Cypriot debt after learning the hard way from their bailout of Greece that began in 2010 and was restructured in 2012.The situations of the two neighboring countries bear similarities: a contracting economy, runaway debt that could surpass 90 percent of Cyprus's gross domestic product, and a banking sector in shambles.
From the vantage point of international creditors, a loan to Cyprus would help the country in the short term but add to its debt and increase its risk of default, as with Greece.
Extremely sensitive to the issue, the IMF did not react officially to Anastasiades's election v ictory but its spokesman Gerry Rice recently reiterated that the global lender was seeking "a durable solution to Cyprus banking sector problems... consistent with debt sustainability."
The Washington-based institution seems to be drawing lessons from the Greek bailout that deepened internal divisions between the European countries and emerging-market powers that oppose lenience toward Athens.
"The IMF is not an aid agency and cannot and should not bear the costs of lending to insolvent countries," Arvind Virmani, a former IMF executive director, told AFP."If Cyprus is insolvent there is no case for IMF to lend to it," said Virmani, who stepped down as India's representative on the IMF board last November.
To improve Greece's solvency, private creditors, mostly foreigners, were forced to write off more than 100 billion euros in Greek public debt in 2012.
But in Cyprus, most of the debt is owned by local investors.
"There isn't a large external private debt. Even if they wanted to, they couldn't get a haircut from external private creditors," the European diplomat said.
Germany, Europe's heavyweight, thinks the tools used for Greece should not apply to Cyprus.
The IMF recently pointed to a different approach, suggesting that Russia could ease the terms of reimbursement for a $2.5 billion loan it gave Nicosia in 2011.Cyprus's financing needs are currently assured until the end of April, but Nicosia has to find 1.4 billion euros by June to refinance its debt.
Debt is not the only issue facing Anastasiades, who takes office at the end of the month for a five-year term.
The potential bailout is clouded by allegations the island is a money-laundering center, especially for Russian criminals.
In mid-February, European leaders asked Cyprus to clarify its position on money laundering and said its answer would be an essential element to any aid.
But Nicosia rejected a European proposal of a private audit on the matter, insisting it had nothing to hide.
"They have to do better than that. The Cypriot documents correspond to the standards, but it is necessary to see them in practice," the diplomat said.