Division, debt and the EU: a Cyprus balancing act

Tiny Cyprus, divided after a Turkish invasion 38 years ago and its economy in recession, is hoping to prove it can carry its weight when it takes over the EU presidency Sunday. "What's important for Cyprus to prove is not that it can organise an event -- what it has to prove is that Cyprus can do the job as well as any other European," Cyprus presidency spokesman Costas Yennaris told AFP. Nicosia sees this as an opportunity to make its mark on Europe, but the omens are not good for the east Mediterranean island, which is split between the internationally recognised Greek Cypriot government and Turkish-occupied north. The republic's government will be carrying a lot of political baggage when it takes on the presidency for six months for the first time since it joined the European Union in 2004. Cyprus was split in 1974 when Turkey invaded after a Greek-inspired coup in Nicosia aimed at uniting the island with Greece. Only Ankara recognises the so-called Turkish Republic of Northern Cyprus, and Turkey has no diplomatic relations with the internationally recognised south. For decades, there have been failed efforts to reunite the island. A plan proposed by then UN chief Kofi Annan was rejected by the south and approved by the north in a 2004 referendum. Talks ever since have been inconclusive, and Turkey now says it has a Plan B, saying it is pointless negotiating beyond July. Ankara wants to join the EU, but has warned that it will freeze its relations with the 27-nation bloc unless a deal is reached to end the division. "There is a danger the Cyprus question or a Turkish Plan B could destabilise the presidency, but Cyprus wants to show it is not a one-policy state but a worthy EU member," Hubert Faustmann, associate professor of history and political science at the University of Nicosia, told AFP. The government has protested orders from Turkish Prime Minister Recep Tayyip Erdogan for officials to stay away from any conference or summit chaired by Cyprus. So Nicosia is apprehensive that Ankara could spoil the presidency feel-good factor. "Cypriots are clever enough not to respond to Turkish provocation. It is an embarrassment for everybody but more of a problem between EU officials and Ankara," Yennaris said. Communist President Demetris Christofias is himself a lame duck after announcing he will not stand for re-election next year after his failure to bring about a Cyprus solution. He has insisted he will not use the EU chair to press the Cyprus issue or as a tool to apply leverage against Turkey. "Greek Cypriots want an image change and to show themselves as good Europeans. They aim to play the honest broker as a small country without too many vested interests on the big European issues," Faustmann said. The political climate has clouded over even further since Turkey stoked tensions by opposing government exploration -- led by US firm Noble Energy -- for gas and oil off Cyprus's south coast. Turkey's ire has also focused on Israel, which seeks to join forces with Cyprus in the energy race. Fallout from the global economic crisis that began in 2008 was late to hit Cyprus, and the recession-hit island is also suffering from the euro crisis fuelled by its banking system's relatively large exposure to Greek debt. Last summer, the economy also took a severe hit when munitions seized from an Iranian ship bound for Syria in 2009 exploded, killing 13 people and destroying a nearby power plant, the island's largest. Cyprus Popular Bank is the most at risk from Greek debt, and the government has committed itself to underwriting a 1.8-billion-euro capital increase by the bank. But the government, already struggling to reduce a budget deficit that exceeds EU ceilings, is unable to borrow on international capital markets, with the three international ratings agencies having classified its bonds as junk. And as had been expected in recent months, Cyprus announced on Monday that it had requested assistance from its eurozone partners, becoming the fifth out the 17 countries that share the euro to seek a bail-out. The government did not say how much it was seeking, but local media speculated it would be in the region of five billion euros ($6.4 billion). Eurozone officials have said the figure could reach 10 billion euros, but Finance Minister Vassos Shiarly said the necessary amount had not been determined. Neither did the government say whether it was seeking a government bailout or funds to recapitalise its banks. The government said it is still seeking help from a third country, such as Russia, from which it secured a low-interest 2.5-billion-euro loan last year to cover refinancing needs for 2012. On top of that, the International Monetary Fund said on Wednesday that Cyprus has asked for financial aid. Cyprus needs to introduce more austerity to meet its EU pledge of reducing the budget deficit to 2.5 percent of GDP in 2012 from 6.4 percent last year. Cyprus had been loath to request an EU bailout, fearing potentially harsh terms, especially as it wants to protect its low corporate tax rate of 10 percent.