UPDATE 3-Euro minister cautious on size of any Cyprus bailout

Wed Mar 13, 2013 4:08pm EDT

* Euro zone, IMF, trying to help island avoid default

* Bailout size expected to be less than 17 bln euros

* Eurogroup head wants bailout nearer to 10 bln euros

By Luke Baker and Gilbert Kreijger

BRUSSELS/AMSTERDAM, March 13 (Reuters) - Cyprus should get an international bailout closer to 10 billion euros than the bigger figures that have been widely reported, the leader of the euro finance ministers' group said on Wednesday.

The 17 Eurogroup ministers will meet on Friday in Brussels after an EU leaders' summit to discuss financial help for Cyprus, officials say.

The meeting, which follows a mission by the 'troika' of international lenders to Cyprus, raises expectations that the euro zone is close to sealing a package of aid that the Mediterranean island asked for last June.

"Friday 5 p.m. (1600 GMT) extra Eurogroup on Cyprus," Dutch Finance Minister Jeroen Dijsselbloem, who chairs the meetings, said on his official Twitter feed.

"The expectation is that the Eurogroup will discuss the outlines of the aid programme," he said separately in a letter to the Dutch parliament.

Many estimates have put the island's bailout needs at around 17 billion euros ($22 billion) - roughly the size of the island's annual economic output, raising doubts about whether it could repay such a sum.

Dijsselbloem later told parliament that he wanted the bailout to be nearer 10 billion euros, but he declined to give an exact figure.

Crippled by its exposure to Greece, Cyprus needs funds from the euro zone to recapitalise its banks and to finance the government over the next three years. Without help, it would slide into default, threatening progress made last year in convincing investors that the euro bloc can manage its debt problems.

Officials told Reuters late on Tuesday that Cyprus could raise money from a levy on deposits and other taxes to hold down the size of its bailout.

Dijsselbloem told parliament a programme for Cyprus must lead to a sustainable public debt level, allow it to repay its loans and revive the economy.

"The programme's size has to be limited," he said.

The troika - the European Commission, the European Central Bank and the International Monetary Fund - have told euro zone finance ministers enough progress had been made in Nicosia to hold the Eurogroup meeting in Brussels, officials said.

The lenders are also discussing the possibility of Cyprus raising its corporate tax rate by 2.5 points to 12.5 percent. They would like to see Cyprus introduce a financial transaction tax, something the country opposes.

WHO TAKES A HIT?

Euro zone officials have said they expect a decision on a bailout before the end of March. One of the most divisive issues is whether to force losses on depositors in Cypriot banks - many of them Russian and British business people - through a "bail-in". German officials, backed by the Netherlands and Finland, have pushed for such a move.

Berlin worries that Cyprus has become a conduit for money-laundering. Russian individuals and companies have a high level of deposits in the banking sector.

But Cyprus says any bail-in would spark the rapid withdrawal of funds from the island, making its plight worse.

Euro zone leaders are not expected to give guidance at the summit on Thursday on whether or not depositors should be targeted, according to one senior euro zone source.

The European Commission, Spain and Italy are against a bail-in, while the European Central Bank has not taken a position, although it is wary of the risks, officials told Reuters.

ECB President Mario Draghi warned last week against underestimating Cyprus' importance. "Cyprus is a small economy, but the systemic risk may not be small," he said.

IMF Managing Director Christine Lagarde is not expected at Friday's Eurogroup, prompting some EU officials to suggest the Washington-based lender may not co-finance the rescue package and will only offer expertise. The IMF declined to comment.

One solution could be that Moscow contributes to the bailout if it receives the same credit status as euro zone lenders, meaning it gets repaid as a priority.

Officials have also said Russian investors are interested in buying a majority stake in Cyprus Popular Bank and increasing their holdings in Bank of Cyprus - the two biggest banks on the Mediterranean island.

New Cypriot President Nicos Anastasiades is to travel to Russia to meet President Vladimir Putin in the coming weeks to discuss possible Russian help, officials said.

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