Cyprus sun lightens sombre mood of Europe's ministers

NICOSIA, Sept 15 Sat Sep 15, 2012 8:00am EDT

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NICOSIA, Sept 15 (Reuters) - They could have been forgiven for just a little celebrating.

Days after a favourable German court ruling, surprisingly smooth Dutch elections and the unveiling of an unprecedented bond-buying plan, Europe's financial leaders meeting in Cyprus might even have taken off their jackets.

But whatever relief they felt at their meeting on Friday and Saturday in the heat of Nicosia, it did not seem to show as ministers sweated in their dark, woollen suits, their ties as tight as ever, even by the swimming pool over dinner.

Markets have rallied sharply in Europe, with stocks up and yields on government bonds falling, thanks in large part to the European Central Bank's decision to launch a conditional bond-buying programme.

The ruling by Germany's top court allowing Berlin to take part in the euro zone's permanent bailout fund has also lifted spirits, all giving rise to a sense in some quarters that the worst of the eurozone debt crisis may be over. Hence, perhaps, a moment to breath a sigh of relief. But no such chance.

Quiet handshakes, rather than congratulatory back slapping, seemed in order at the hotel. Mario Draghi, the ECB's president, breakfasted alone at the hotel restaurant, occasionally looking up from his table to greet his colleagues.

And at dinner on Thursday evening, while Draghi ate outside, his table illuminated only by the dim pool lights, the Greeks, the Irish and the French talked quietly, keeping to themselves on nearby tables.

Only Jean-Claude Juncker, who chairs the monthly meetings of euro zone finance ministers, shared a joke with Draghi as he arrived that night and pulled the Italian's ears. But then he sat down on a different table, lost in serious conversation with the International Monetary Fund's head Christine Lagarde.

One minister, Spain's Luis De Guindos, was briefly taken back to the hotel on Friday suffering from a fever. Talks on emergency financing for Spain had to wait for him to return.

"People remain very cautious," said a senior European official present at the two days of talks.

"We've come very far. But it is not because finance markets are picking up a little that we can relax," he said.

On the same day as Germany's Constitutional Court gave approval for the country to ratify the new bailout fund, Dutch voters shunned anti-EU radicals in parliamentary elections.

Now many officials and investors see a framework finally emerging to resolve a three-year debt crisis that has sucked the region into economic recession.

"I'm not sure whether we are in the eye of the storm where it's obviously quite calm, or whether we've actually left the storm behind," said one official.

DRAGHI'S SIESTA

Over the Cypriot delicacies of lamb and Campari sorbet that ministers were served at lunch on Friday, aides and officials -- who also had their share of chilled Cypriot white wine -- said the mood was clearly more relaxed than a year ago.

Draghi had a siesta after Friday's lunch. Some of the delegates came to Cyprus with their spouses and children.

It was very different last September. U.S. Treasury Secretary Timothy Geithner was so concerned by Europe's inability to act that he flew to the meeting in Wroclaw, Poland, but then was berated by euro zone ministers for interfering.

"In Wroclaw, there was an atmosphere of the end of the world," said one senior euro zone diplomat. "Today, it's much better. Draghi has helped us a lot to be a bit more relaxed about the future of the currency."

Europe still faces obstacles on all fronts, from a banking sector crippled by years of runaway lending to Spain's potential request for aid and an economic depression in Greece, the cradle of the European sovereign debt crisis.

So the dress code is set to remain dark suits and ties for the men and sombre attire for the women because ministers are wary of dressing down, aides said.

But there is optimism.

"There is a sense that now we can cope, we can handle the challenges," said one euro zone official in Nicosia. "There still are challenges, but they can be dealt with... eventually."

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