Cyprus uses pension money to pay holiday salaries

By the Associated Press | December 17, 2012 | 1:33 PM EST

A man smokes a cigarette as he passes in front of a sign advertising a retail location for rent as another man parks his motorcycle outside a clothing shop at central Nicosia, Monday, Dec. 17, 2012. Cyprus’ state coffers are depleted and government workers may go unpaid this month unless state-owned companies urgently lend the government some €250 million ($329 million) from their pension funds, the finance ministry’s top civil servant warned Monday. (AP Photo / Petros Karadjias)

NICOSIA, Cyprus (AP) — Cyprus' cash-strapped government had to get loans from state-owned companies to make sure it could pay its own workers' salaries during the holiday period, officials said Monday.

Finance Ministry Permanent Secretary Christos Patsalides had urged three big companies to agree to lend €250 million ($329 million) from their pension pots in order to prevent a meltdown of the state's finances. All three indicated that they would be willing to do so.

"What would be the outcome if these additional financing needs aren't secured? We'll be talking about the state declaring a suspension of payments in the next few days," Patsalides had told the Parliamentary Finance Committee before the companies agreed to the loan.

He said the loan would allow the government to continue paying salaries until the end of February, by which time the country expects to start receiving money from a bailout agreement it is finalizing with the 'troika' of the European Commission, the European Central Bank and International Monetary Fund.

Patsalides said the troika had suggested that the government turn to state-owned companies to cover the fiscal shortfall.

Were Cyprus' to default on its salary payments, credit rating agencies would cut the country's debt grade to 'selective default', in turn harming the companies themselves, Patsalides said.

Some union leaders criticized the government for going after their pension savings and expressed fears that they may never see the money returned. Others asked that the government provide iron-clad guarantees that the money will be re-deposited in their pension funds.

Still, the Telecommunications Authority and Ports Authority said they would agree to lend the government €100 million and €38 million respectively in light of dire situation the country finds itself in. Officials from the pension fund of the Electricity Authority, which had the most misgivings, relented late Monday and said they would also lend the government €100 million. Fund manager Georgios Pistentis said that the loan, which would be in the form of a government bond purchase, is subject to "certain confidential conditions" to which the finance ministry has agreed.

Cyprus sought international support for its ailing banking sector, which has assets worth four times the country's €17.5 billion ($23 billion) economy. The three main commercial banks lost a combined €4.5 billion in toxic Greek debt and bad loans.

A draft of the bailout agreement says that Cypriot banks may need up to €10 billion to bring them back to financial health. The exact figure will be known around the middle of next month once international financial firm PIMCO and auditors Deloitte finish scrutinizing the banks' books.

The banks' woes, combined with a burgeoning deficit, pushed the country's credit rating deep into junk territory and made the government unable to borrow from international markets. Cyprus secured a €2.5 billion, low-interest loan from Russia last year, but a follow-up request to Moscow for a second, bigger loan was unsuccessful.

The country's parliament passed earlier this month a raft of troika-agreed tax increases as well as salary and benefit cuts to rein in a bloated public sector that soaks up a sizeable chunk of all government spending.