EFSF For Bank Recapitalisation Only, Says Govt Spokesman

The government reiterated its position that it would only turn to the European Financial Stability Fund (EFSF) to recapitalise Cyprus banks that urgently need more capital, according to government spokesman Stefanos Stefanou.

His statement was contradicted shortly afterwards by Finance Minister Vassos Shiarly, who said a potential bailout would be to recapitalise banks and for the entire economy.

Borrowing from the EFSF is 'not bad or shameful', said Shiarly speaking before the House Finance Committee. He referred to Spain as an example, saying that Cyprus should follow in its footsteps and bail out its banks through a loan from the EFSF.

Over the weekend, Spain informed the Eurogroup it intended to apply for a 100 billion-euro loan from the EFSF to recapitalise its banks.

Time is running out for Laiki Bank, which lost 2.5 billion euros on its Greek debt exposure and now needs 1.8 billion to pass European Central Bank stress tests at the end of June. The state has already stepped in with a bail out plan for Laiki, and now expects to get the funds either from a third country or from the EFSF. By the end of May, there was still no success in getting a bank recapitalisation loan from a third country, said Shiarly.

Hellenic Bank has also started advertising its own capital increase to the public with a radio commercial.

The government is not in a position to bail out the banks amid an economy in a recession and no access to international borrowing markets. There is speculation that it may need more funds other than those for a bank recapitalisation.

According to former Central Bank Governor Athanasios Orphanides, this is because the government overspent on its own running expenses like payroll and new projects, burning through the surplus and leaving the banking sector exposed and without back up.

Although there has been an economic slowdown in the eurozone and a recession in Cyprus, the government has been slow to cut its own costs, the income for which comes from taxes like VAT. During a recession, consumer spending slows down, reducing VAT income for the government. Without timely cost reductions, the government's spending created a higher deficit, which reached 6.1 percent in 2011.

A new package of cost-cutting measures has been promised by Finance Minister Vassos Shiarly but so far it has failed to appear amid resistance from President Demetris Christofias and trade unions, which oppose austerity measures on the grounds that they will prevent growth.

This has resulted in calls from the opposition for Shiarly's resignation.

Realistically, hopes for true economic growth and development are limited this year, with the Central Bank forecasting negative economic growth of -1.1 percent.

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