Pressure on Cyprus to sell off some of its gold

Mediterranean island looks to raise extra €6bn to avoid bankruptcy

Pressure is growing on Cyprus to sell some of its gold reserves so that the Mediterranean island can become eligible for the international bailout it requires to avoid bankruptcy.

It emerged this week that Cyprus's total financing needs over the coming years will be €23bn (£20bn) rather than the €17.5bn thought just weeks ago when the original terms of the bailout were sketched out. Other eurozone states have refused to offer more than the €10bn already pledged to the smallest single currency member, leaving the government of President Nicos Anastasiades to plug the €6bn gap itself.

One idea mooted in recent days is for Nicosia to raise some extra cash by selling €400m in excess holdings from its gold reserves. Eurozone finance ministers gave the green light to that proposal yesterday, despite fears that such a sale might destabilise gold markets and create financial contagion for other troubled southern European states.

At a press conference in Dublin yesterday, the head of the Eurogroup of eurozone finance ministers, Jeroen Dijsselbloem, said that "selling some gold has always been a option put forward by the Cypriot authorities".

He added, however, that the final decision on how to raise the needed funds lay was up to Nicosia.

The proceeds from the Cyprus gold sales would come on top of the haircut that will be imposed on depositors with more than €100,000 at Cypriot banks agreed last month – a move that has already considerably ratcheted up investor nerves in the single currency area. In the wake of that decision Cyprus last month became the first eurozone member state to impose capital controls in order to prevent a run on its banking sector.

The rest of the €6bn shortfall is likely to be made up of further levies on wealthy depositors and possibly a compulsory haircut for holders of Cypriot sovereign debt.

Cyprus is forecast to suffer a deep recession as a result of the crisis, with the island's GDP shrinking by as much as 8.7 per cent this year, followed by 3.9 per cent in 2014.

The Eurogroup said in a statement yesterday that it expects its own €10bn payment to be made to Nicosia on 24 April after approval by national parliaments.

The Eurogroup yesterday also agreed to give Portugal and Ireland a further seven years to repay their own rescue loans in order to ease financial market pressure on the two member states, which are both due to return to the financial markets to fund their deficits over the next 12 months.

Separately the president of the European central bank, Mario Draghi, has warned Nicosia against sacking the head of the Cypriot central bank, Panicos Demetriades, over his performance. Mr Demetriades has come under attack by the government in Nicosia for mishandling the banking crisis that has compelled Cyprus to become the fifth eurozone state – after Greece, Ireland, Portugal and Spain – to require an external bailout.