Eurozone seeks deal on Cyprus bailout

BRUSSELS (AP) -- European finance ministers are trying to complete a long-delayed bailout deal for Cyprus in a bid to keep the island nation from a bankruptcy that could rekindle the region's debt crisis.

If a rescue loan package is agreed on at Friday's extraordinary meeting in Brussels, it is likely to come with tough strings attached for Cyprus, including measures to shrink its troubled banking sector, raise taxes and privatize state assets.

The bailout was initially estimated to total up to €17 billion ($22 billion) but will now more likely cost around €10 billion.

While that is many times smaller than Greece's €240 billion bailout or Ireland's €67.5 billion, it is still considered crucial to the future of the eurozone because a debt default by even a small country could roil financial markets and undermine investor confidence in other eurozone nations.

"This is not just about Cyprus, but about the eurozone as a whole," said the Netherlands' Jeroen Dijsselbloem, president of the Eurogroup meetings of the 17-nation eurozone's finance ministers.

Cyprus' prospective bailout creditors — the eurozone and the International Monetary Fund — have not explained yet how they would get the size of the bailout to drop from €17 billion to €10 billion. A key component, however, appeared to be Russia's willingness to chip in financially to help its longtime ally.

Russia is likely to extend repayment of a €2.5 billion ($3.2 billion) loan it granted Cyprus in late 2011 after the country could no longer tap international markets, but Russia might also provide a new loan, according to a Cypriot official who spoke on condition of anonymity because he wasn't authorized to discuss the negotiations. Cyprus might also look for Russian investors to snap up stakes in its troubled banks.

Cypriot Finance Minister Michalis Sarris will hold talks Monday in Moscow about Russia's possible contribution.

At Friday's meeting, the ministers were expected to discuss the results of a fact-finding mission and its recommendations for the design of the bailout program.

"That will not be easy," Dijsselbloem said on his way into the meeting. "It is a complicated case but we have to work on that."

Officials and EU leaders such a Luxembourg's Prime Minister Jean-Claude Juncker, a former longtime Eurogroup president, have voiced confidence that a deal will be reached in principle on Friday, but Dijsselbloem struck a more cautious tone, saying "we will see how far we get tonight."

German Finance Minister Wolfgang Schaeuble also dampened hopes that a deal is nigh, saying it's not about winning a little time but about addressing the underlying problems such as Cyprus' high debt burden, the outsized financial sector and the lack of growth. "That's why the preconditions for the (rescue loan) program are difficult," he said.

The initially planned bailout of about €17 billion to keep Cyprus' banks and government afloat would have ballooned the country's public debt to about 145 percent of GDP, a level the IMF and most economists consider unsustainable.

The economy of Cyprus, an east Mediterranean island of around a million people, represents less than 0.2 percent of the eurozone's annual economic output. But even the most reluctant EU partners, such as Germany, have accepted it would be better to bail out Cyprus than let it go bankrupt, an outcome that would risk rekindling the bloc's three-year-old debt crisis.

"If one thinks that Cyprus might no longer be able to pay its bills, then one reaches the conclusion that this point should not be reached," German Chancellor Angela Merkel said Friday after a summit of the European Union's 27 leaders. "To just leave Cyprus to itself and see what happens is irresponsible in my opinion," she added.

Cyprus, which first applied for a bailout last summer, is not in any imminent danger of bankruptcy, as it faces its next bond redemption only in June. But the European Central Bank, concerned that prolonged uncertainty over Cyprus could hurt market sentiment across the eurozone, has pushed for a swift deal, even threatening to cut the country's financial system off from an emergency funding scheme.

If the finance ministers reach a deal as planned at Friday's meeting, it is likely to be a broad political decision, with technical details to be hammered out next week. The bailout would then still have to be approved by parliaments in several eurozone nations, though EU officials say everything should be done by the end of the month.

The deal will also be needed to convince Russia to contribute: President Vladimir Putin has said Moscow would only consider helping if eurozone countries had a bailout package ready.

To appease its potential rescue creditors, Cyprus has already accepted an independent audit of its banks, which hold billions in Russian deposits, to soothe concerns voiced by Germany, France and others that they launder dirty Russian money. The new conservative government, which took power last month, has also indicated that it will sell state assets and raise its corporate tax, the lowest in Europe, to increase revenues.

Another option to reduce the amount of bailout loans Cyprus needs is making the sizeable Greek operations of its two largest banks, Bank of Cyprus and Laiki, eligible for rescue cash from Greece's own bailout accord. The government in Athens, however, has at best appeared reluctant on the matter.

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Menelaos Hadjicostis in Nicosia, Cyprus contributed reporting.

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Juergen Baetz can be reached on Twitter at http://www.twitter.com.jbaetz