Merkel Flies Into Cyprus to Consider Nation’s Not-So-Small Debt Problem

German Chancellor Angela Merkel joined her European conservative counterparts at a resort in Cyprus for a meeting of the European People’s Party. For those in Cyprus, the event doubled as a rally for Nicos Anastasiades, the head of the DISY opposition, who aims to take the presidency after elections next month.

Looming in the background is the country’s bailout, the fifth bailout of a European Union member since the debt crisis broke out. Despite it’s size — at 18 billion euros ($24 billion) Cyprus is the third-smallest euro-area economy — the rescue package has proved a headache for EU leaders. Among other accusations, there’s concern that funds could end up backing illicit deposits in a country that’s become a favorite among wealthy Russians. The magnitude of the financial hole is daunting: it may be close to matching the size of Cyprus’s GDP — so helping out the banks could balloon the country’s outstanding debt. These debt levels raise the prospect of writedowns, which would hit bondholders and even depositors.

It’s little wonder that the mood music among leaders at the seaside resort in the Limassol hinted that a decision by finance ministers on a bailout could stretch past this month or next. Such a delay could also sit well with investors waiting for Anastasiades to take power. Ahead in the polls, he seems poised to succeed Cyprus’s current president, Demetris Christofias, a communist who stands firmly against privatization.

Anastasiades himself appeared less sanguine about kicking the can down the road. Cyprus and the troika should reach a deal “as soon as possible to avoid the worst,” he said. “There are visible dangers to delay.”

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