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Monday, March 04, 2013

Could the UK be asked to contribute to a Cypriot bailout?

As we have noted before, the potential impact of the Cypriot bailout has the capacity to extend well beyond what would be expected of a country accounting for only 0.2% of eurozone GDP.  This impact is now also lapping at the UK shores.

As we flagged up in our press summary today, new Cypriot Finance Minister Michalis Sarris said over the weekend:
"There are indications that London would participate in a package…for a country that has special links with the U.K., if it were necessary, some way could be found to help in a transitional manner."
This comes a bit out of the blue since there has generally been an unspoken agreement - as well as some formal guarantees - that the UK would not participate in any further eurozone bailouts.  That said, the inclination here seems to be that given the historic ties between the UK and Cyprus, the UK may be more willing to contribute – similar to the Irish bailout.

Apart the IMF - which could play a role and to which the UK contributes - there's another plausible avenue: the European Financial Stabilisation Mechanism (EFSM), which the UK partly underwrites via the EU budget. This fund has around €11.5bn left to lend if needed, while there is always the Balance of Payments facility (which we discussed in our paper on Grexit last summer). The EFSM is also decided by QMV although consensus is usually sought since it is politically controversial to activate. In any case, theoretically the UK could still be dragged in.

That said, it seems pretty unlikely and it would be seen as a pretty hostile move – we also imagine other non-euro countries such as Sweden, Denmark and Poland would not be keen to fund a country to which they have few links. Unsurprisingly, the WSJ cites UK diplomats dismissing the prospect out of hand.

But Sarris’ comments are a reminder that the eurozone crisis continues to impact the UK in a number of ways.

5 comments:

Rik said...

Seems complete nonsense stated by an unexperienced and not to clever politician.
The UK or better any country should stay away from the EuroZone and especially the rescues.

What is more interesting is the statement by the Rumenian minister that Rumenians would be entitled to UK welfare. Immigration will be a major issue the coming years, whether people get nervous of being accused of being racist or similar or not.

jon livesey said...

"This comes a bit out of the blue since there has generally been an unspoken agreement - as well as some formal guarantees - that the UK would not participate in any further eurozone bailouts."

OK, but since when did unspoken or even formal guarantees ever prevent the EU from moving the goal-posts after the game has begun?

You know, there does come a time when you can't continue to pretend to believe in the EU's good faith without becoming complicit in its actions.

Rollo said...

There is a grave danger here. Various Russian oligarchs have invested heavily in Cyprus because they see it as a crack into an easy door into Europe. We can be sure that it will involve avoidance of taxes, peddling of influence etc.

Jesper said...

Sweden might have similar concerns as Germany. There has been some high-profile cases about tax-avoidance relating to Swedish companies and Cyprus.

The issue may or may not be a big real problem, it might be a political/publicity problem.

Then again, Ireland does get funding and the 'double Irish' is still allowed.
http://www.cnbc.com/id/100467344/In_Europe039s_Tax_Race_It039s_the_Base_Not_the_Rate_That_Counts

Anonymous said...

Unfortunately, eurozone crisis continues to impact so many countries, so it is better to stay away from it as far as possible. You are saying that a number of Russian oligarchs have invested a lot in Cyprus as they see it as a crack into an easy door into Europe. We can be sure that it will involve avoidance of taxes, peddling of influence etc. This is exactly how Russians do their business. So it is better UK be off helping Cyprus crisis. We surely do need our people taken out online loans no faxing as a result of this crisis.