UPDATE 2-Cypriot president rejects bailout with privatisations
* Christofias says draws line at privatisations, withholding bonuses
* Says island is preparing counterproposals
* Cyprus sought aid in June
NICOSIA, Oct 3 (Reuters) - Cyprus will not accept a bailout from international lenders on the current terms being offered, President Demetris Christofias said on Wednesday, with the indebted government set to propose alternative savings.
Setting the tone for tough negotiations with lenders, Christofias said he would never sign a bailout deal which called for the sell-off of profitable state-owned enterprises, or which would abolish inflation-linked salary increments.
It was the first time Christofias explicitly ruled out lending proposals as they presently stand, though officials have frequently said they considered the proposals non-binding and "building blocks" towards a deal.
A draft economic adjustment programme prepared by the European Commission, the ECB and the IMF and submitted to Cyprus in July called, among other things, for ending wage indexation, known as CoLA, and embarking on a privatisation programme.
"We aren't just saying 'no' to them," Christofias told Greek state broadcaster NET in an interview. "We are giving them counterproposals. They are being prepared, we are in the very final stages and which will provide for as much in savings as they (the troika) wants," he said.
Cyprus sought aid in June after its two largest banks suffered huge losses on their exposure to Greece, forcing them to turn to the government for aid.
The island, shut out of capital markets for 15 months and wrestling with its own fiscal imbalances and its first recession in almost 40 years, applied for a comprehensive bailout.
WARY AT GREEK EXPERIENCE
Wary at the Greek experience, Cyprus has attempted to put down markers of how far it can go; government officials have frequently been critical of the bailout conditions imposed on Greece, and the island's ruling communist party has said an exit from the euro zone could even be considered if their terms were too harsh.
"This neo-liberal method of dealing (with the crisis) is bankrupt," Christofias said, referring to Greece. "Its a vicious cycle,a Sisyphean task."
He also took aim at a perception southerners were too laid back. "As Cypriots we consider this an insult.. we re-built Cyprus in three or four years after losing 70 percent of our economy," he said, referring to a war in 1974 which split the island into two and displaced thousands.
Cyprus is the third-smallest nation in the 17 member euro zone. The bailout amount has not been defined, but Russia, a close business and political ally, last week said Cyprus required 15 billion euros from the EU.
Nicosia has also sought a 5 billion euro bilateral loan from Moscow.
A significant chunk of that amount is believed to be for banks, which expanded aggressively into the Greek market in the past decade but are now attempting to ring-fence their operations there.
"What happened with the banks was a crime," Christofias said.
The ministerial cabinet was due to meet on Wednesday evening to finalise counter-proposals and Christofias was scheduled to meet party leaders on Friday for further discussions.
Scrapping CoLA and halting payment of year-end bonuses in the broad public sector is unlikely to go down well with a highly-unionised workforce, particularly ahead of a general election in February 2013.
Christofias, elected in 2008 and with close ties to labour unions, has said he does not plan to seek a second term.
"You cannot tell someone they won't receive a 13th (month's)salary. It automatically means you paralyse the market," Christofias said.
"I can assure you, I will not sign any memorandum which scraps CoLA. The same applies to two or three other measures," he said, referring to the 13th month's salary and privatisations.
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