UPDATE 1-Cyprus seeks longer period to pay off bailout lenders

NICOSIA Thu Oct 4, 2012 11:02am EDT

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NICOSIA Oct 4 (Reuters) - Cyprus has proposed deeper savings than those put forward by the island's international lenders, but wants more time to pay its bailout off, draft proposals seen on Thursday show.

Cyprus sought aid from the European Union and the International Monetary Fund in June after its two largest banks took overwhelming losses on their lending to Greece and turned to the state for financial support.

International lenders discussing economic aid to Cyprus have asked for a cumulative 975 million euros in savings over a four-year period. In counter-proposals leaked on Thursday, the Cypriot government has asked for a five-year adjustment period, until 2016, with measures totalling 1.01 billion euros ($1.30 billion) in savings.

The island, one of the smallest in the 17-nation euro zone, has been unable to borrow from international markets for more than a year because of the high borrowing costs implied by yields on its traded debt.

A document of Cyprus's cost saving recommendations leaked to media on Thursday was to be discussed by party leaders on Friday in a meeting with the president.

Cyprus counters proposals by lenders to cut public-sector salaries by 15 percent over a two-year period, favouring a more staggered approach.

The government has suggested a scaled reduction in public-sector salaries on earnings between 1,001 and 3,500 euros monthly by nine percent, and 11 percent on earnings exceeding 3,500 euros.

It has also suggested a 10 percent reduction in entry salaries in the civil service and a freeze in increments.

It will request public and private-sector employees to file one percent of their income to a "social cohesion fund" initially, raising to 2 percent in 2014 and 3 percent thereafter.

The government also pledges to increase value added tax by one point to 18 percent, freeze pensions, increase tax on tobacco and alcohol and raise the contribution made by public-sector employees towards their pensions.

There is no provision for abolition of an inflation-linked wage indexation which the troika sought, scrapping end-year 13th-month salaries in the public sector, or privatisations.

Cypriot President Demetris Christofias on Wednesday ruled out signing any memorandum which would include these.

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