Cyprus looking at EU, Russia, China for bailout

NICOSIA/DUBLIN Wed Jun 13, 2012 11:55am EDT

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NICOSIA/DUBLIN (Reuters) - Cyprus is looking to Europe, Russia and China for the best possible bailout terms, officials said on Wednesday, and could seek as much as 4 billion euros ($5 billion), or more than a fifth of its economy.

Speculation is mounting that an international bailout for euro zone member Cyprus is imminent, but its communist government has kept markets guessing so far.

Deputy Europe Minister Andreas Mavroyiannis said 1.8 billion euros was needed within the next few weeks to recapitalize struggling Cyprus Popular Bank but that other banks may need money too.

He said if Cyprus chose to tap the EU bailout mechanism it might ask for more than the 1.8 billion euros to be on the safe side.

"We are talking about figures that could be 3 or 4 billion euros maximum," Mavroyiannis told Reuters on a visit to Ireland.

Cyprus's gross domestic product is less than 19 billion euros.

The country is seeking ways to avoid tapping the EU because of what Mavroyiannis described as the "negative connotation" that comes with it. EU bailouts come with conditions on how to cut debt.

"If we eventually apply, because it is not a given that we will apply (and) there are also other options, we will seek the best possible terms for the economy," said Panicos Demetriades, the governor of Cyprus's central bank.

That could be Russia, a close ally of Cyprus, or China.

Bilateral lending, which the Cypriot finance minister has repeatedly described as "not the preferred option", is returning to prominence as a likely scenario.

"Everything is on the table," Mavroyiannis said. "It can be a combination (of bilateral and European money). I don't know if it will be Russia or China."

Russia bailed Cyprus out last year and is an important business partner.

STRINGS ATTACHED

Cyprus has repeatedly displayed caution about strings which may be attached to any bailout from its EU partners.

Its primary concern is that its cherished 10 percent corporate tax rate could be compromised. Austerity measures similar to those imposed on other bailed-out states, including Greece, would also force the government into unpopular spending cuts ahead of a general election due by February 2013.

Asked whether the prospect of bilateral lending was remote, Finance Minister Vassos Shiarly told state TV in an interview on Tuesday night: "I would say not."

A resort to bilateral lending rather than EU partners would raise eyebrows within the bloc, particularly as Cyprus is poised to assume the European Union's rotating presidency on July 1.

Economist Stelios Platis said the government may be dangling the option of bilateral lending as leverage to potentially extract better bailout terms from the EU.

"They want to exhaust all options and time to find alternative means of finance. In my view it's an ill-conceived idea that this can be negotiated. It's (the) wrong strategy, you can't use this as leverage," Platis said.

In the television interview, Shiarly reiterated earlier comments that the island would not "wait until the last day" to take action to prop up Popular, either through bilateral lending or by resorting to the European Financial Support Facility.

"It's like plucking daisies, wondering 'will we get in to the mechanism, we won't, we will, we won't'," said George Perdikis, an MP for the Green's party.

Popular and the other main bank, Bank of Cyprus were hit heavily by the writedown on Greek debt, which was restructured as part of Athens' second EU/IMF bailout deal. Bank of Cyprus has almost completed its recapitalization privately.

Moody's Investors Service on Tuesday cut its credit rating on Bank of Cyprus, and put Popular on review for a downgrade, citing the increased risks of a possible Greek exit from the euro zone. Cyprus's third bank, Hellenic was also downgraded. [ID:nL1E8HCC1S] ($1 = 0.7953 euros)

(Editing by Jeremy Gaunt)

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