* ECB's Asmussen says Cyprus is systemically relevant
* Says it is obvious Cyprus will default without assistance
* Could have negative impact on Greece, rest of euro zone
* But bailout must include anti-money laundering, tax
(Adds details, background)
By Annika Breidthardt
BRUSSELS, Jan 22 Financial problems of Cyprus
could still derail fragile confidence in the euro zone that the
bloc fought hard to regain in 2012, European Central Bank board
member Joerg Asmussen said on Tuesday.
His comments follow doubts whether the small island state,
with gross domestic product of barely 0.2 percent of the euro
zone's output, was large enough for a potential default there to
unsettle the 17-nation euro zone, such a risk being a
precondition for a bailout.
"Disorderly developments in Cyprus could undermine progress
made in 2012 in stabilising the euro area. Cyprus could well be
systemic for the rest of the euro area despite its size," he
said on the sidelines of a meeting of EU finance ministers.
"Under normal circumstances one would expect the direct
impact of a default to be limited, and it's obvious that without
assistance the country will default," he told Reuters, but added
the situation was not normal.
"At the same time we should recognise that the situation is
not normal. Even though the promise of the OMT (ECB
bond-buying)and other important decisions have calmed the
markets, this situation is still fragile."
Among those to question the potential impact of difficulties
in Cyprus is German Finance Minister Wolfgang Schaeuble, who has
said repeatedly it was not yet clear "the problems in Cyprus
could be a danger to the euro zone as a whole".
"We have to (establish) that very clearly as that's what the
(ESM) treaty says and we do need to stick to the rules we agreed
in the treaty," Schaeuble told reporters late on Monday.
But Asmussen said Cypriot problems could affect
twice-bailed-out Greece through banking channels and send a
negative signal to the rest of the euro zone, especially harming
the outlook for states trying to regain full access to the
Cyprus applied for financial aid last June after its banks
suffered huge losses following an EU-approved writedown of Greek
debt, but some states, including Germany, are also uneasy about
bailing out a country they say lacks financial transparency.
The concerns have centred on allegations from some states
that Cypriot banks may be misused for money laundering and tax
evasion, a view Cyprus rejects. Asmussen said monitoring and
addressing such issues needed to be included in a bailout.
Finnish Prime Minister Jyrki Katainen said last week Cyprus
must open its books and quell speculation its banks may have
been used for laundering money, before it can receive aid.
Cyprus rejects the accusations.
"Cyprus is under attack from various quarters over its
supposed money laundering. I say supposed, because there have
been assessments both by the Council of Europe and international
bodies and such a thing has not been established," government
spokesman Stefanos Stefanou said on Tuesday.
"The European Union should display solidarity towards a
member state, which is essentially a victim of a European
decision. Let us not forget the (losses on Greek bonds) was a
European decision, and Cyprus is today paying the price."
Cypriot banks were badly burnt by an EU-sanctioned writedown
of privately-held Greek sovereign debt. Investment manager PIMCO
is carrying out a review of its bank capital needs, with the
findings being assessed by a committee of lenders and Cypriots.
Preliminary estimates of a draft bailout deal put the bill
at 10 billion euros for bank support. On that basis, its total
bailout, including fiscal needs, could reach 17-17.5 billion
euros, equivalent to the island's annual economic output.
Asmussen, who was previously Germany's deputy finance
minister, said he expected a bailout agreement was possible at
the end of March, after Cypriot elections on Feb. 17.
The current Cyprus government reiterated on Tuesday it would
not give in demands for greater privatisation, something euro
zone lenders have said they want to see in return for aid.
"As a government, we will fight to ensure semi-government
organisations are not privatised, even if some in Europe
consider it part of economic reform," Stefanou said.
But Finance Minister Vassos Shiarly was more conciliatory.
"We have to be sensitive to the issues which may arise in
other member states. We are the applicants, they're the lenders,
we have to be sensitive to their own issues," he told reporters
in Brussels. "Therefore, if they say 'January', January; if they
say 'February', February; if they say 'March', March. We have
the ability to manage our fiscal requirements. We are strong and
we can manage it."
(Writing by Annika Breidthardt, additional reporting by Michele
Kambas in Nicosia and Charlie Dunmore in Brussels; editing by