Published November 29, 2012
NICOSIA – Cyprus could agree a bailout deal with euro zone finance ministers by mid-December and get a first tranche of funds to shore up its banks by the end of January, its finance minister said on Thursday.
The island, whose banks are heavily exposed to debt-crippled Greece, has been discussing aid conditions with the IMF and EU institutions since June. It could need up to 17.5 billion euros ($22.6 billion), equal to its entire annual economic output.
Finance Minister Vassos Shiarly told lawmakers a preliminary agreement had been reached with international creditors, which needed to be supplemented with a definitive assessment of the banks' recapitalization needs.
That assessment will be ready by December 7, he said.
"There is a preliminary deal with the troika," Shiarly said, referring to lenders from the International Monetary Fund, the European Central Bank and the European Commission. "(But) I anticipate discussions over the next few weeks will be difficult, perhaps more so than before."
Cyprus had already been shut out of international capital markets by the time its banks turned to the government for help.
Little is known about the four-year program under negotiation with the 'troika' of international lenders, except that it envisages heavy spending cuts, including to pensions, and that it targets a primary budget surplus - the balance before deducting debt financing costs - of 4.0 percent of gross domestic product (GDP) by 2016.
Shiarly said authorities were discussing an interest rate of 2.5 percent with lenders, which he described as "very good" under the circumstances.
Lenders say a final agreement cannot be reached until there is more clarity on the capital needs of the island's banks.
Shiarly, speaking to parliament's finance committee, avoided specifying the banks' needs, saying these would be assessed by consultants.
"Many figures have been speculated, from 5 billion to 15 billion euros. Let's wait for the assessment, and even then, that could change," he said, citing the example of Spain, where recapitalization assessments have moved significantly lower.
A working scenario was a conclusion on Cyprus by mid-December, with up to six weeks for a deal to be ratified by the national parliament. "That would bring us to the end of January for the first tranche," Shiarly said.
Once agreed, the bailout would make Cyprus the fourth euro zone nation to get a sovereign rescue after Greece, Ireland and Portugal. Spain has been granted financial aid to recapitalize its banking sector, but Madrid has not so far asked for money to cover state needs.
(Reporting by Michele Kambas; Editing by Ruth Pitchford)