Michalis Sarris, the newly appointed finance minister of Cyprus, said Sunday that he was determined to reach a bailout agreement with international lenders but warned that meeting some of their demands could damage the island’s lucrative financial sector and hamper growth.
Mr. Sarris was speaking ahead of a meeting of euro zone finance ministers Monday that is expected to focus on options to address the debt crisis in Cyprus and on renewed concerns over the future of the euro since the Italian electorate voted a week ago in large numbers for parties rejecting reforms and austerity.
Cyprus, the fourth euro zone country to need a bailout, faces a bond repayment of about €1.4 billion, or $1.8 billion, in June. E.U. officials want the government in Nicosia to reach a deal with the so-called troika of international lenders by the end of this month.
Talks with Cyprus stalled when the previous, government balked at terms including the privatization of government assets sought by the troika — the International Monetary Fund, the European Commission and the European Central Bank. Cyprus first sought aid from Russia before finally accepting the need for a European bailout.
Mr. Sarris, who was appointed last week by the center-right government that prevailed in elections last month, told a group of reporters that it would not be necessary to make major changes to a draft bailout agreement reached last year with the troika. But he echoed some of the previous government’s concerns about a deal.
Mr. Sarris warned against forcing Cypriot bank depositors to take losses, rushing headlong into privatizations or taking an overly aggressive approach to combating money laundering — all of which, he said, could worsen the country’s fragile economy.
“We have had substantial outflows of deposits” that had been “very damaging to the Cyprus banking system,” said Mr. Sarris, a former World Bank economist who previously served as finance minister between 2005 and 2008. Such outflows risked “working against our stated common objectives to stabilize the banking system,” he said.
A number of prominent lawmakers in Germany and other euro zone states say they believe the island country, with its low taxes and lax bank regulation, is a hub of money laundering.
In a sign that Cypriots want to maintain some level of banking secrecy to lure investors and financial services, Mr. Sarris said there was skepticism in Cyprus about a money-laundering investigation that meant “anybody who has any money in the banking system has to have their name analyzed and reported when they have nothing to hide.”
Mr. Sarris said an analysis of Cypriot compliance with money-laundering rules should be under “the umbrella of Moneyval,” a group of financial experts that is part of the Council of Europe, but should also involve experts from the private sector.
Mr. Sarris declined to say what state assets could be sold, but he suggested that such sales could begin within three years if “careful preparations” were made to protect workers.
He said that Russia had indicated it would be willing to extend the maturities or adjust interest rates on its loans to Cyprus, and he said Britain, although outside the euro zone, had indicated that it could participate in a rescue package.
Cyprus needs about €17 billion in aid, of which up to €10 billion is needed to shore up the banking sector.
That is a fraction of what has been pledged to Greece but represents a colossal sum for Cyprus, which has a gross domestic product of only about €18 billion. That has prompted concern about how it could ever pay the money back.
Cypriot banks took a blow when they were forced to write down their holdings of Greek government debt as part of that country’s second bailout.
Mr. Sarris accepted that the Cypriot banking sector would have to shrink. But he said forcing losses, or haircuts, on depositors, would be self-defeating because it would damage investor confidence.
“We do not want to kill the economy and we don’t want to create bad precedents for anybody else,” he said.
Some experts have proposed ideas like putting deposits above €100,000 into an escrow account for a number of years to use as collateral for aid, or imposing a retroactive tax on such funds.
Mr. Sarris declined to comment on those proposals, saying they could become part of sensitive negotiations.
During the meeting on Monday of the so-called Eurogroup, finance ministers also are likely to discuss the Italian election stalemate, broadly seen as a vote of no confidence in the austerity policies promoted by leaders like Chancellor Angela Merkel of Germany.
But some analysts warn that there may not be much that finance ministers or the E.C.B. can do to stabilize the Italian economy even if the country’s borrowing costs spiral out of control.
“The political situation in Italy is problematic, especially as it highlights a structural flaw with the euro zone’s crisis-fighting instruments, which assume stable governments will be in place to request assistance,” said Mujtaba Rahman, a senior analyst at the Eurasia Group.
New York Times