Cyprus says troika bailout terms difficult to accept

(NICOSIA) - Cypriot President Demetris Christofias said on Wednesday the bailout terms put forward by the troika of international lenders were difficult to accept.

"The negotiations are difficult, as we expected, but the political terms proposed by the troika are difficult to accept," Christofias said in the text of a speech to be delivered to the local business community.

While agreeing that time is of the essence, he said it was more important to get the right deal for the cash-strapped economy and its beleaguered banking sector.

"In our view the substance and content of the agreement are decisive parameters as they will determine the future of our country and its people in the years to come."

His comments contrast with one by Finance Minister Vassos Shiarly in Brussels on Tuesday, in which he said he was "looking for a good result towards the end of the week."

It seems the government is unhappy with the amount of public spending cuts the troika would have it make and the insistance that profit-making state-own utilities be privatised.

Representaives of the troika -- the European Commission, the European Central Bank and the International Monetary Fund -- have been on the island since Friday to thrash out the extent of public-sector cuts required in return for financial aid and to see how badly damaged the Greek-exposed banking sector is.

Local media have speculated that this will not be the last visit, as it could take longer to work out how much the banking sector needs to recapitalise.

The higher that figure is, the tougher the loan terms are likely to be.

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 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.

The government reportedly 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 tax pension payments.

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 VAT to 19 percent by 2014, a five cent rise in excise duty on petrol and 150 million euros slashed off state benefits.

The European Commission predicts bailout candidate Cyprus will sink deep into recession until 2015.

It sees a rapid deterioration, with GDP expected to contract 2.3 percent 2012, by 1.7 percent next year and by 0.7 percent in 2014.

The finance ministry says GDP will shrink by 2.2 percent in 2012 and the budget deficit be contained at five percent of GDP, down from 6.3 percent last year.

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