* Cyprus eyes deal on bailout by Nov 12
* Island pushed deeper into junk by Standard & Poor's
* Negotiations fraught with delays as elections loom
By Michele Kambas
NICOSIA, Oct 17 Cyprus said on Wednesday it
expected talks to start with lenders on badly needed aid next
week, as ratings agency Standard & Poor's pushed it deeper into
junk territory, implying domestic political expediency lay
behind a delay in clinching a deal.
One of the smallest nations in the euro zone, Cyprus sought
European Union (EU) and International Monetary Fund (IMF) aid in
June after its two largest banks suffered huge losses due to a
write-down of Greek debt.
A conclusion with lenders on aid has been plagued by delays
as the island's government attempted to get the public onside
with an austerity package pending since July.
"I am sure we will have a positive conclusion to our request
for aid," Cypriot Finance Minister Vassos Shiarly told
Standard & Poor's, which downgraded Cyprus three notches to
"B" from "BB" with a negative outlook, said electoral
considerations - a presidential election is due in February 2013
- contributed to "policy inertia".
Meanwhile, it said, the state - shut out of international
capital markets since mid 2011 - was relying heavily on
distressed banks it was obliged to recapitalise, in the absence
of direct European Stability Mechanism support for Cypriot
DEAL SOUGHT BY MID-NOVEMBER
Cypriot officials say the government is keen for a bailout
deal by mid-November. Without that, there is speculation that
the island of one million inhabitants could face a cash crunch
as early as December.
Asked by Reuters whether he expected discussions with
lenders to start before the end of the month, Shiarly said:
"Within the month, and certainly in the coming week. Time is
restricted and there is not much time left."
But with elections looming in four months and unwilling to
take the flak for any fallout from unpopular austerity measures,
the leftist government has apparently been biding its time on
taking a stand on lenders' austerity proposals pending since
"If the problems were dealt with in a more timely manner our
economy would be in a much better state, and we wouldn't be
confronted with the dilemma of either going broke, or accepting
onerous terms," said Photis Photiou, a senior official of the
opposition centrist Democratic Party.
BAILOUT AMOUNT UNCLEAR
It is unclear how much aid Cyprus may require. The island
has been unable to fund itself since it was shut out of capital
markets 18 months ago.
Shiarly said a figure had not been set for Cyprus's
financial needs because of a difference of opinion between the
government and lenders on the recapitalisation needs of banks.
There is widespread speculation Cyprus's bailout will exceed
10 billion euros ($13 billion), or 60 percent of its GDP.
Cyprus's fiscal requirements until 2015 amount to about 5
Standard & Poor's said the island's real economy was being
increasingly strained by worsening domestic credit conditions,
and domestic loan books of banks were deteriorating faster than
It said it expected a support package upwards of 15 billion
euros to 2015, "but we note the considerable uncertainties
surrounding the estimates of the banking sector's potential
capital needs," Standard & Poor's said.
The talks involve the European Commission, IMF and the
European Central Bank, known as the troika.
In measures expected to generate 975 million euros in
savings, they have asked for cutbacks to an inflated public
sector payroll, pension reform and creation of a 'bad bank' to
assume problem exposures of the financial sector, mainly in