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Cyprus eyes alternatives to EU bailout

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(NICOSIA) - Cyprus could opt for a foreign loan instead of an EU bailout to deal with its crisis-hit economy if the terms are favourable, the island's central bank governor said on Wednesday.

Panicos Demetriades said the emphasis was on securing much needed funds to support a Greece-exposed banking system on terms that were the least painful.

"If we finally enter (the mechanism), it is not a given that we will. There are other options -- we will seek the best terms for the economy and these terms must include the consolidation of the banking system and nothing more," he told reporters.

"If possible entry to the EU support mechanism is only to do with the consolidation of the banking system, then I believe there will be no additional costs to the Cypriot tax payer. I believe the same is valid for a bilateral loan," he added.

The government is loath to introduce more austerity and is committed to safeguarding its low 10 percent corporate tax rate -- as foreign investment is the lifeblood of a recession-hit economy.

But opposition parties have urged the government to request an EU bailout "as soon as possible" so it has room to negotiate a better deal.

Pro-government Haravgi newspaper said the state was continuing efforts to secure a bilateral loan to help recapitalise the banking system so it would not need to ask Brussels for a bailout.

It did not identify the country from which Cyprus is seeking a loan but China is thought to be in the frame.

Cyprus has already secured a 2.5 billion euro ($3.2 billion) low-interest loan from Russia to cover its refinancing needs for this year.

On Tuesday, government spokesman Stefanos Stefanou said Nicosia was looking at "different options" and that no decision to apply for EU funds had been taken.

This was in response to Finance Minister Vassos Shiarly's suggestion to a parliamentary committee on Monday that Cyprus would need an EU bailout not only to prop up the banks but also to cover "other needs".

However, the government has insisted that its only problem is recapitalising the banks not on dealing with an unwieldy budget deficit which was twice the EU ceiling of three percent in 2011.

The government has already underwritten a 1.8 billion euro capital issue for the island's second largest bank, Popular, which is the most heavily exposed to Greek debt.

If private money does not cover the issue when the offer ends on June 29, the state will be lumbered with a liquidity strapped bank and no cash to fund it.

The government is committed to reducing its bloated deficit to below three percent this year from 6.4 percent in 2011. But it is reluctant to introduce deeper public cuts to drastically slash the deficit.

Neither the government nor its commercial banks have been able to borrow from international money markets since last June due to the island's debt being reduced to junk status by two of three international credit agencies.

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