Cyprus living hand to mouth until EU bailout comes

(NICOSIA) - Cyprus has taken the extraordinary step of dipping into public authority pension funds to pay salaries for December but it still teeters precariously on the brink while waiting for EU bailout money.

The eurozone member was forced to request the bailout in June when its two largest banks asked for assistance after failing to meet EU capital criteria as a result of massive exposure to toxic Greek debt.

"The government is living hand to mouth and will keep on doing so until money comes from international creditors but there is still a risk of everything collapsing," analyst Fiona Mullen told AFP.

A finance ministry official told parliament on Monday that the government could not meet its bumper December wage bill -- which includes so-called 13th month bonuses -- unless it was loaned around 250 million euros from cash-rich quangos.

Employees were reluctant to heed the call, fearing that, if their pension funds were used to buy government bonds, then their entitlements might fall victim to a Greek-style "haircut" further down the line.

But the government struck deals with the boards of the electricity, telecommunications and ports authorities to borrow around 250 million euros in the short term.

"The government has been forced to use unorthodox means to meet its everyday expenses, but Cyprus has covered its foreign debt requirements until June," Mullen said.

She said the island's predicament was the result of the government delaying its request for an EU bailout in an abortive bid to avoid the embarrassment of an application during its tenure of the EU presidency until the end of the year.

A troika of lenders -- the European Commission, European Central Bank and International Monetary Fund -- is expected to make its recommendation to the eurogroup on January 21.

But it would take weeks before Cyprus sees its first tranche of money as other EU parliaments must first rubber stamp the deal.

On Tuesday, the finance ministry tried to calm nerves, saying in a brief statement that the "government has secured all current financing needs and there is no possibility of a default on payments".

Economist Costas Apostolides said public sector workers had had little option but to back the plea for funds as the government had rebuffed pressure from the troika to privatise state utilities, something they had strongly opposed.

"Employees don't want to be privatised so they had to support the government which supported their view, so a deal was done," Apostolides told AFP.

Had the government agreed to sell off public monopolies like the Cyprus Telecommunications Authority, which is valued at at least two billion euros, it could have sharply eased the amount it needed to borrow from international lenders.

"These semi-government organisations are obviously well off and have huge amounts of money. They can afford to give the money and still remain relatively diversified," said Apostolides.

An independent assessment is being carried out into how much Cyprus's Greek-exposed banking system needs to boost liquidity before a final bailout sum is agreed.

But the final report is not due before mid-January, meaning extra funds must be found in the meantime.

Nicosia has pushed through tough austerity measures to meet troika demands for more than a billion euros in cuts and savings. The four-year adjustment programme represents 7.25 percent of gross domestic product.

Parliament has approved public sector salary cuts, a freeze on index-linked wages until 2016, extended emergency salary contributions in the public and private sectors, and increases in duty on cigarettes, alcohol and petrol.

But rising unemployment in an economy which is expected to shrink a further 3.5 percent next year threatens to put a further burden on state finances.

"There is a recession so you must take abnormal measures," Apostolides said.