Euro zone weighs Cyprus bailout and whether depositors should help pay
* Ministers meet to discuss Cyprus, no decision until late March
* Around 1.6 bln euros left Cyprus in Jan. after talk of depositor losses
* New Cypriot finance minister to present options for financing bailout
By Jan Strupczewski
BRUSSELS, March 4 (Reuters) - Euro zone finance ministers will discuss how to fund a bailout of Cyprus on Monday with differing views on whether to make bank depositors pay a share of the cost.
No final decisions are expected until later in March.
Cyprus first requested a bailout in June last year but it was not possible to reach an agreement with the last, communist-led government. A new, conservative government has now taken office and negotiations will intensify in the weeks ahead.
President Nicos Anastasiades promised on Thursday to work for a swift deal to prop up the island's banks, which need capital of around 8-10 billion euros. The total bailout, including financing for general government operations and to finance existing debt, could be up to 17 billion euros, equal to Cyprus's annual economic output.
At Monday's meeting, euro zone ministers will examine a variety of options to finance the bailout and ensure that it is "sustainable" - that Cyprus can repay what it borrows.
Among the provisions expected in a programme is the privatisation of state assets, starting with the island's telecoms company which could raise up to 1.5 billion euros, and the restructuring of the bloated banking sector.
German officials, backed by the Netherlands and Finland, have also pushed for depositors in Cypriot banks to help pay for the cost of the rescue, a process known as a "bail-in".
There are concerns in Berlin that Cyprus, with its low corporate tax rate and liquid banking system, has become a conduit for money laundering. Russian individuals and companies have a high level of deposits in the banking sector.
Cyprus is concerned that any "bail-in" will spark the rapid withdrawal of funds from the island and undermine its entire business model, making the economic situation even worse.
Figures released last week showed around 1.6 billion euros ($2.08 billion) - a little over 2 percent of total deposits - was withdrawn in January as talk of a "bail-in" intensified.
Cyprus's newly appointed finance minister, Michael Sarris, called the bail-in idea a bad proposal.
"Really and categorically - and this doesn't only apply in the case of Cyprus but for the world over and the euro zone - there really couldn't be a more stupid idea," Sarris, a widely respected economist, told reporters last week.
He will push that line in discussions on Monday, the head of his office said, while adding that a variety of other options were open to discuss to make a bailout viable, including an extension of a 2.5 billion loan from Russia and the possibility of Russia taking a controlling stake in Cyprus Popular Bank, one of the hardest hit by the Greek debt crisis.
Olli Rehn, the European commissioner for economic affairs, warned over the weekend that the prospect of Cyprus leaving the euro zone remained a dangerous possibility, saying such a prospect should be a concern even for big EU economies.
"Even if you come from a big EU country, you should be aware that every member of the euro zone is systemically relevant," Rehn was quoted as saying in Der Spiegel in a veiled criticism of German Finance Minister Wolfgang Schaeuble, who has questioned whether the tiny island is systemically relevant.
"If Cyprus becomes disorderly insolvent, it is very likely that would lead to it exiting the euro zone," Rehn said.
While ministers will discuss Cyprus in detail on Monday, no decision is expected until later in March, when an extraordinary meeting will likely have to called to agree the rescue package.
Monday's meeting will also assess Ireland and Portugal, with the possibility that both countries will be given slightly longer to pay back the rescue loans they have already received.
While a small island economy, the difficulty with Cyprus is finding a way to make a bailout sustainable so that any money provided is repaid, especially given that public opinion in countries such as Germany, Finland and the Netherlands.
A 17 billion euro rescue would increase Cyprus's debts to around 145 percent of GDP, a level considered unsustainable. Greece's bailout calls for it to cut its debt-to-GDP ratio to 120 percent by 2020, but that would be too high for Cyprus.
The IMF and other officials believe Cyprus should have to cut its debt-to-GDP ratio to just below 100 percent, but Cyprus is likely to push back against that, saying 120 is manageable.
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