Cyprus hopes to avoid austerity if it seeks EU aid

By MENELAOS HADJICOSTIS

NICOSIA, Cyprus

Cyprus' finance minister said Monday that he's optimistic the eurozone nation won't be forced into enacting harsh austerity measures if it seeks a European Union bailout.

Vassos Shiarly repeated that an European Union bailout remains one option the government is weighing to help recapitalize its large, Greece-exposed banking sector -- 7.5 times the size of the Cypriot economy -- and to meet future financing needs. Another is to secure a loan from another country.

Shiarly said he believes that Cyprus has "a good possibility of securing favorable terms" if it asks for the bailout cash because of the country's low fiscal deficit and public debt relative to other EU members.

"I'm optimistic that in case we apply for help from the (support) mechanism, I believe that we can secure good terms, but you understand that this is something that must be discussed and negotiated," Shiarly said after briefing lawmakers.

Cypriots fear that turning to the temporary European Financial Stability Facility would spell the kind of hardship that other bailed-out countries such as Greece and Portugal are enduring because of the austerity measures adopted in exchange for the money.

Cyprus is also keen to protect its low, 10 percent corporate tax which is a major drawing card for its services-oriented economy.

"We mustn't vilify the mechanism. The mechanism is there to support member states and this has been proven most recently with the discussion regarding the matter of Spain," Shiarly said.

The government last month underwrote a (EURO)1.8 billion rights issue for Cyprus Popular Bank, the island's second-largest lender and most exposed to Greece, to help it raise the money through private investors and meet a June 30 recapitalization deadline.

If the bank can't raise the capital, the government will have to put up the money which is equal to a tenth of Cyprus' economy.

And it's cash Cyprus doesn't have. Credit rating downgrades have shut the country out of international borrowing markets and it's relying on a Russian loan to pay its bills this year.

Moreover, the economy is projected to contract by one percent of gross domestic product this year, adding more pressure on the government to look for sources of funding.

Shiarly said the government is determined to keep the fiscal deficit to 2.5 percent of GDP this year and will soon unveil new spending cuts and tax increases to offset a 1 percent deviation from the target.

Spain's decision to tap the EU bailout fund to recapitalize its troubled banks seemingly without harsh austerity strings attached may also bode well for Cyprus.

But Shiarly was careful not to draw direct parallels between the two countries, saying Spain's bailout fund recourse was unique and may not necessarily apply elsewhere.

"This has been a first time case and therefore, I think we'll probably have to wait and see the final outcome," said Shiarly.