Brace for fiscal pain caused by banks - Cypriot president
* Cypriot President says bailout will bring pain
* Says banks, regulator were reckless to Greek exposure
* Cypriot banks will need up to 10 bln euros to recap
NICOSIA, Dec 4 (Reuters) - Cyprus's president on Tuesday warned islanders of fiscal pain ahead under an international bailout he said could have been avoided but for profligate banks and an ineffective regulator.
Cyprus, the euro zone's smallest economy after Malta, has reached a preliminary deal with the IMF and the EU to borrow up to 17.5 billion euros ($22.90 billion) - almost equivalent to the country's entire annual output.
Demetris Christofias, who is leading the Cypriot side in aid talks, said Cyprus had no choice but to turn to outsiders for help after its largest banks took huge losses on exposure to debt-crippled Greece and looked to the state for aid.
"We took the decisions we did with heartfelt pain," Christofias said in a televised public address.
Looking sombre in the pre-recorded speech and appealing for public unity, he said: "Decisions of the banks, and inadequate supervision by the central bank, are costing Cyprus many billions of euros."
Christofias, a communist who was once Cyprus's most popular politician, has taken the brunt of public discontent at perceived botched handling of the economic crisis on an island which prided itself for pulling through post-war turmoil after its split in a 1974 Turkish invasion triggered by a brief Greek inspired coup.
He is not seeking a second term in an election scheduled in February, and his AKEL communist party is trailing in opinion polls.
A preliminary deal between Cyprus and lenders has set 10 billion euros in aid to banks, but this is provisional pending an interim assessment by external consultants expected by Dec. 7.
In addition, Cyprus will over the four years to 2016 have to reschedule an estimated 6.0 billion euros in maturing debt, and will also require 1.5 billion euros to plug deficits until then, finance ministry sources say.
Authorities have pledged to cut salaries in the public sector by between 6.5 percent and 12.5 percent, suspend wage indexation, introduce pension reform and extend retirement ages, introduce new tax calculation methods for real estate and incrementally increase taxes like VAT.
"I am the last person who will attempt to idealise this memorandum and attempt to whitewash things ... there are many measures which are truly painful, and measures which, under other circumstances I would not even discuss," Christofias said.
Christofias has repeatedly blamed lax supervision by the former administration of Cyprus's central bank and reckless expansion into Greece by the banks themselves for the mess the economy is in.
The former regulator, Athanasios Orphanides, denies the accusation. He has said Christofias failed to heed repeated warnings about fiscal slippage and bore some responsibility for the banks taking a hit when EU leaders decided to write down Greek bond values in late 2011.
Christofias did not refer specifically to this decision in his speech. "We have never claimed infallibility," he said. "This however cannot be an excuse for blaming everything on the president and the government." ($1 = 0.7642 euros) (Reporting By Michele Kambas; editing by Ron Askew)
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