Germany balks at backing bailout package for Cyprus


BERLIN When it came to helping out Greece, Ireland and Portugal, Germany grudgingly went along with its European partners and backed hundreds of billions in rescue loans. But now that tiny Cyprus is in trouble, German politicians appear even less eager to help - which could put the Mediterranean island country on the path to bankruptcy and out of the eurozone.

For Chancellor Angela Merkel's government, the bailout for the nation of some 850,000 people is proving to be the most difficult rescue loan package yet.

Germany's lawmakers, who have a pivotal role because they must approve all European bailouts, are balking at helping out a country they see as a haven for Russian tax evaders and money launderers run by a government that isn't fully committed to financial and structural reforms. Moreover, they wonder openly whether tiny Cyprus going bust would affect the eurozone at all.

"To make it very clear: I do not want to vouch for black Russian money," said Volker Kauder, the influential caucus leader of Merkel's conservative bloc. Another coalition leader, Rainer Bruederle, warned there was currently no majority for a Cypriot bailout because there were "too many question marks."

Eight months ahead of national elections in Germany, the main opposition party, the center-left Social Democrats, is openly threatening to veto the bailout. Given the rising number of dissenters in her conservative bloc, Merkel for the first time stands a real risk of losing a vote on her European policies.

Compared to the multibillion-euro rescue packages for Greece or Portugal, Cyprus seems like small change. The country, the third smallest economy in the 17-nation eurozone, is after a rescue loan almost the same size as its $23.2 billion economy to recapitalize banks and keep the government afloat. So far, Greece has received roughly $319 billion in rescue loans while Ireland got $89.7 billion after it struggled to prop up its banks.

But economists say it remains a mystery how Cyprus would get back on its feet after taking on more debt and imposing austerity measures on an economy already in recession.

"It's not realistic to think Cyprus would be able to pay back that much, there must be a form of debt write-off at some point," said economist Christoph Weil of Germany's Commerzbank.

The island's financial problems stem from its banking industry, which holds assets eight times the size of the country's economy. The banks used their money, a sizeable chunk of which came from Russian investors, to make big investments in banks and other businesses in Greece - a nation with whom Cyprus shares the language and has historically close ties.