Cyprus talks with troika lenders set for Friday

(NICOSIA) - The troika of international lenders will begin talks with the Cyprus on Friday to seek a draft agreement on a bailout deal for the financially beleaguered Mediterranean island, the finance ministry said.

Cyprus applied for an EU bailout in June after its biggest lenders, Cyprus Popular Bank and Bank of Cyprus, could not meet new capital reserve limits because of huge losses from their exposure to bailed-out Greece.

Representatives from the European Commission, European Central Bank and International Monetary Fund (IMF) will begin their third round of meetings in Cyprus, the ministry said in a statement.

The talks at the "technocratic and political level, are intended to bring forward the discussions on policy issues. Among others, the issues to be discussed include structural matters, the macroeconomic framework as well as issues related to Cyprus's financial sector," it said.

The continuing negotiations will be aimed at "achieving convergence."

The IMF confirmed on Wednesday that a team is headed to Cyprus. "On the basis of progress made by the authorities since July, an IMF mission is scheduled to return to Cyprus this week," it said.

Eurozone member Cyprus has the unenviable tag of being the first country to hold the bloc's six-month rotating presidency, which it assumed on July 1, while also negotiating EU emergency aid.

A document leaked to the media shows the government apparently proposing to raise revenue through more taxation and fewer cutbacks over a longer period than proposed by the troika.

No figure has been given as to how much Cyprus actually needs, but many experts believe it will exceed 10 billion euros ($12.7 billion) to prop up an 18-billion-euro economy.

It hopes to cut the debt gap by slightly more than one billion euros by the end of 2016 rather than the one billion euros in mostly public finance cuts the troika seeks by 2015.

The troika's proposal is 80 percent through expenditure cuts and 20 percent from increased taxes.

It reportedly wants to slash the state payroll by 15 percent, shave 10 percent off welfare benefits, scrap an inflation-linked cost-of-living allowance and roll back government-subsidised housing finance.

But the government has resisted that, saying it would undermine an economy already in recession and expected to shrink by 1.5 percent this year.

The government's proposed ratio is 60:40, including a two percentage point hike in VAT to 19 percent by 2014, a five cent rise in excise duty on petrol and 150 million euros slashed off state benefits.