March 13, 2013 / 10:16 AM / 4 years ago

Euro zone meets on Friday to try to seal Cyprus deal

Dutch Finance Minister Jeroen Dijsselbloem speaks at a news conference in The Hague February 1, 2013.Bart Maat

BRUSSELS/AMSTERDAM (Reuters) - The euro zone's 17 finance ministers will meet on Friday in Brussels after an EU leaders' summit to discuss a financial bailout of Cyprus, officials said on Wednesday, signaling growing momentum for a deal.

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. (12:00 p.m. EDT) 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 program," he said separately in a letter to the Dutch parliament.

Crippled by its exposure to Greece, Cyprus needs funds from the euro zone to recapitalize its banks and to finance the government over the next three years. Without help, it would slide into default, risking the euro zone's credibility and threatening progress made last year in convincing investors that the bloc will not be overwhelmed by its debt problems.

Initial estimates on the size of the bailout have been as much as the whole Cypriot economy produces in a year, some 17 billion euros ($22 billion), raising doubts whether the euro zone member state would ever be able to pay back the money.

Officials told Reuters late on Tuesday that Cyprus may require a smaller bailout than that because it could raise money from a levy on deposits and other taxes.

In his letter, Dijsselbloem said a program for Cyprus must lead to a sustainable public debt level, allow it to repay its loans and revive the economy.

"The program'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. The lenders would also like to see Cyprus introduce a financial transaction tax, something the country opposes.

Who Takes a Hit?

Euro zone officials have said they expected a decision on a bailout to be taken before the end of March. One of the most divisive issues is whether to force losses on depositors in Cypriot banks as part of a rescue package, known as a "bail-in".

German officials, backed by the Netherlands and Finland, have pushed for depositors in Cypriot banks, many of whom are Russian and British business people, to help pay for the rescue.

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 will spark the rapid withdrawal of funds from the island and undermine its entire banking system, making the economic situation even 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 not to underestimate Cyprus' importance at his last news conference last week.

"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 gives expertise. The IMF declined to comment.

One solution could be that Moscow contributes to the bailout if 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 CPBC.CY and increasing their holdings in Bank of Cyprus BOC.CY - 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.

Additional reporting by Jan Strupczewski and Robin Emmott; writing by Robin Emmott, editing by Mike Peacock

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