* Finance Minister focused on securing bailout
* Moody's says Cyprus default risk increasing
* EU's Rehn rules out debt restructuring
* Merkel says Cyprus must reform
By Michele Kambas and Gareth Jones
LIMASSOL, Cyprus/BERLIN, Jan 11 Cyprus appeared
to win conditional support for its bailout bid from EU paymaster
Germany on Friday, hours after a savage credit ratings cut
intensified the indebted island's economic misery.
Rating agency Moody's slashed Cyprus by three notches to
Caa3 late on Wednesday, taking it further into "junk" territory,
and warned it could be downgraded again.
It predicted the country's debt pile would continue to rise
because of the capital needs of its banks, burned by their
exposure to crisis-wrecked Greece, and said it saw an even
chance of default..
Germany, wary at the prospect of bailing out a country it
says must improve financial transparency, nonetheless said
European Union members must stand by each other.
"Cyprus must move forward with its own obligations and
reforms to the economy but at the same time we must show
solidarity," Merkel told reporters as she arrived in Cyprus for
talks with other conservative politicians. She said that was a
fundamental EU principle.
Cyprus, one of the bloc's smallest economies, applied for a
financial rescue last June after its banks suffered huge losses
on the EU-approved writedown on Greece's debt, and is expected
to be the fourth recipient of a euro zone bailout.
"The challenges are really huge, but I am sure if and when
the country can get a new and strong and committed leadership
capable of strengthening confidence ... it will have a
tremendous positive impact," Finnish Prime Minister Jyrki
Katainen said on Friday.
The comments were a boost for Cypriot opposition leader
Nicos Anastasiades, who is a frontrunner to win parliamentary
elections on February 17.
Anastasiades, who leads the right-wing Democratic Rally
party, was hosting a meeting on the island of the European
People's Party, an EU-wide group.
He told Reuters on Thursday he was committed to meeting the
terms of any international aid package.
A potential rescue bill of 17 billion euros, roughly
equivalent to its entire economic output, has deepened concerns
among EU partners about Cyprus's debts, and some doubt it would
be able to repay the aid without more concessions from lenders.
Germany has expressed unease about channelling taxpayers'
money into a country seen by some as a hub for money laundering.
Cyprus, a popular tax haven for wealthy Russians, says it fully
complies with international rules against money laundering.
Debt restructuring has been ruled out as an option by both
Nicosia and Brussels, with European Economic and Monetary
Affairs Commissioner Olli Rehn quoted as saying on Friday that a
'haircut' was not under consideration.
FOCUSED ON THE POSITIVE
Reacting on Friday to the Moody's downgrade, Cypriot Finance
Minister Vassos Shiarly said he wanted to focus on the positive,
saying he looked forward to the conclusion of a bailout deal.
"A conclusion on a memorandum of understanding does improve
the prospects," he told state radio. Asked about the rating
action, he said: "We are not at all happy about it."
Cyprus's outgoing leftist government has faced criticism
that it was slow to adopt financial reforms, and to negotiate
effectively with lenders. It has been relying on short-term,
high-yield borrowing from domestic banks and public corporations
for the past several months.
Cyprus is expecting the results of an asset review of its
banking sector on January 18. Preliminary reports suggest banks
will need anything between 7.3 billion and 10 billion euros.
Under the worst-case scenario, an assessment Cypriot
authorities are hoping to avoid, the total bill for a bailout
could rise to 17 billion euros. With fiscal needs, that would
push Cyprus's eventual debt burden to 140 percent of GDP.
Economists say a debt restructuring would be futile in
Cyprus's case as the majority of its debt is held by the
domestic banks a bailout would be aimed at saving.
"It might satisfy someone's sense of justice, but it wont
solve the problem," said Nicosia-based independent economist
Fiona Mullen. "There aren't any easy answers out there, apart
from giving them a thousand years to pay it back."