Troika launch Cyprus bailout talks

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

After a marathon day of talks, Cyprus said there was "progress" in the negotiations with the European Commission, the European Central Bank and the International Monetary Fund.

The troika is aiming to thrash out the extent of public sector cuts in return for much-needed financial aid.

"There was a review of what has been put forward and discussed with the troika and there was an estimation that a lot of work and progress has been made," government spokesman Stefanos Stefanou said.

"But there is still a lot of work to do... there is a difficult job ahead," he told reporters.

Stefanou said there was a "willingness and determination" on behalf of the government to work intensively so "we can reach a loan agreement as soon as possible".

Troika officials expected to remain on the island until next week, and discussions on Saturday are to focus on the country's liquidity-sapped banking sector.

State radio said it may not be the troika's last visit as it could take longer to work out how much the Greek-exposed sector needs to recapitalise.

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.

A finance ministry statement said on Thursday that the issues to be discussed include structural matters, the macroeconomic framework as well as issues related to the financial sector.

The continuing negotiations would be aimed at "achieving convergence," 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 analysts 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.

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

And negotiations come at a time when the European Commission predicts bailout candidate Cyprus will sink deep into recession until 2015.

It sees a rapid deterioration, with the economy expected to contract 2.3 percent of gross domestic product in 2012 against a backdrop of "unwinding imbalances and widespread loss of confidence."

The Cypriot economy is expected to shrink by 1.7 percent in 2013 and 0.7 percent in 2014, said the EU's autumn forecast.

The finance ministry said this calculation was made without taking in to consideration proposed austerity measures as part of a bailout.

It believes the economy will shrink 2.2 percent in 2012 and the budget deficit be contained at 5.0 percent of GDP, down from 6.3 percent last year.

"2013 will be a difficult year for the Cyprus economy but a gradual improvement is expected during 2014-2015," said the ministry in response to the forecast issued Wednesday.

Cyprus has been unable to borrow from international markets since last year when credit rating agencies lowered its sovereign rating to junk status.