Hard slog ahead for Cyprus deal - euro zone official

VIENNA, March 2 Sat Mar 2, 2013 7:52am EST

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VIENNA, March 2 (Reuters) - Striking a deal to bail out Cyprus will be hard but an accord has to be negotiated by the end of this month, a senior euro zone official said.

The remarks from Thomas Wieser, head of the Eurogroup Working Group of senior officials who prepare decisions of euro zone finance ministers, come just before Cyprus tops the agenda at a Eurogroup meeting on Monday.

In an interview with Austrian broadcaster ORF aired on Saturday, Wieser cited the danger that the euro zone's debt crisis could flare up again.

"Why? We have a series of existing uncertainties. We have Cyprus before us which will be difficult to resolve," he said.

"We have the uncertainty of how Italy will be governed and how the financial markets could react. That of course has possible contagion effect for other members states."

Cyprus's bailout request has been on hold for the past eight months but euro zone officials have said they expect a conclusion by the end of March.

"It's getting a bit tight," Wieser said. "The financing of Cyprus is still secured for the coming weeks and months but we have to come to a negotiating result in the course of March."

Pressed on how long Cyprus was safely funded, he said the country "with some effort" had financing secured into May.

Scenarios have been floated in recent weeks over how Cyprus, one of the euro zone's smallest economies, could ever afford to repay a bailout bill which could reach 17 billion euros ($22.1 billion), almost the same size as its economy.

European policymakers have been split over how to handle a bailout of Cyprus, with Germany and some other countries pushing for bank depositors to bear part of the cost and many other member states worried such a move will cause a bank run.

Cyprus's new finance minister on Friday ruled out a haircut, or imposed losses, on bank deposits to ease a financial bailout from international lenders, now stalled amid worries about debt sustainability.

Wieser reiterated that Cyprus's steps to crack down on suspected money laundering will be a precondition for any outside aid but warned against blanket accusations that the country was awash with dubious funds from Russia.

He said it was unfair to suggest all Russian money there was suspect or to assume that other foreigners' funds in Cyprus were beyond reproach.

On other subjects, Wieser said it might be possible to adjust the timing for some aid recipients' fiscal consolidation programmes but he did not name any countries.

"Perhaps one or the other country will get an additional year to achieve the 3 percent (deficit) limit, but there is no movement at all in the direction of saying deficits should not be reduced but rather stay the same or even expanded," he said.

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