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Eurozone tackles sensitive Cyprus debt bailout

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(Globalpost/GlobalPost)

Eurozone finance ministers meet Friday to thrash out a relatively small but important bailout for Cyprus, the fifth member state to need help in the face of a debilitating debt crisis.

After Greece with two rescues worth some 380 billion euros ($496 billion), Ireland'S 85 billion euros, Portugal's 78 billion euros and 41 billion euros for Spanish banks, Cyprus may cost only 17 billion euros, probably even less.

But more than the sum involved, it is the principle that none of the 17 eurozone states be allowed to default which counts and this will drive the talks to a conclusion despite several difficult issues, analysts and officials say.

"I do not know," said Eurogroup head and Dutch Finance Minister Jeroen Dijsselbloem when asked about how much money could be at stake.

But "I know what my main goals are -- to make sure that there is stability in the eurozone and that there is a new sustainable growth path possible for Cyprus," Dijsselbloem said as he arrived to chair the meeting.

"Those are the boundaries within which we have to find a solution," he said.

German Chancellor Angela Merkel, speaking earlier at the close of a summit of European Union leaders, said she could not say if their finance ministers would reach a deal Friday, after inconclusive discussions among eurozone leaders late on Thursday.

"Obviously, it is better to negotiate quickly but it takes time to arrive at a worthwhile agreement because we have to have a durable solution," Merkel said.

International Monetary Fund head Christine Lagarde delivered a similar message as she went into the meeting.

"We don't want a band-aid (solution). We want something that lasts, that is durable and sustainable."

Cyprus, whose banks were badly exposed to their failed peers in Greece, sought a bailout in June 2012 but negotiations proved difficult, with the country hoping at one stage to get help from Russia with whom it has strong ties.

Cyprus Finance Minister Michalis Sarris reportedly flies to Moscow for talks Monday about extending a 2.5-billion-euro Russian loan payment due in 2016, and to discuss how Russia could contribute to a bailout package.

The new conservative government elected in February has brought fresh urgency to the rescue talks, which must first agree how much help to provide.

A bailout of 17 billion euros would equal the total annual output of the Cypriot economy and increase the country's debt burden to what are deemed unsustainable levels, a key point for Lagarde and the IMF.

To reduce it to a more manageable level, a deal could require Cyprus to sell state-owned assets, hike taxes, especially its very low corporate tax rate of 10 percent, and make the banks' depositors take some of the burden.

This debt 'haircut' or 'bail-in' is the most controversial option and has been bluntly rejected by Nicosia as risking a massive run on the banks which would sink its financial system and threaten the whole euro single currency.

A key sticking point for hardline lenders like Germany has been the island's Russian connections and its banks alleged involvement in money laundering.

Alan Lemangnen at the Natixis investment house said he expected ministers would discuss a package of around 10-13 billion euros.

There should be progress but there remain several "stumbling blocks, including public debt sustainability, IMF and Russia participation, anti-money-laundering compliance... and a potential 'bail-in" of Cypriot banks," Lemangnen said in a note.

"All in all, the scenario of an overall agreement remains ruled out for now, and EU senior officials have already talked about a second extraordinary meeting next week," he said.

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http://www.globalpost.com/dispatch/news/afp/130315/eurozone-tackles-sensitive-cyprus-debt-bailout-1