Cyprus' potential international creditors said Friday they have made "good progress" in negotiations on a possible bailout for the crisis-hit country.
Despite earlier hopes that a deal was imminent, representatives from the so-called troika of the European Commission, the European Central Bank and the International Monetary Fund said long-distance talks would continue on securing an agreement. Once an agreement has been reached, Cyprus will become the fourth member of the 17-strong group of European Union countries that use the euro to receive international help with its debts.
The troika representatives said they are awaiting the preliminary results of an investigation into how much Cyprus' ailing banks will need to shore up their finances. This will help determine the size of a bailout that won't push the country's debt to unsustainable levels.
"Discussions are expected to continue from respective headquarters with a view to making further progress toward a potential program," a troika statement said.
Cyprus' Finance Minister Vassos Shiarly explained that the government has reached an "in-principle agreement" with the troika on the terms of the bailout deal.
"Negotiations will follow which can't be completed at this time because they have to do with the recapitalization of banks and we'll have that amount at the beginning of December," Shiarly told reporters.
Shiarly said that once the recapitalization figure is calculated, a bailout accord can then be finalized. Cyprus' euro partners should then be able can rubber-stamp the deal when they meet next month, possibly on Dec. 12, he added.
The minister said parliamentary approval from eurozone member countries is expected to come at the end of January when Cyprus will be able to draw the cash it needs from the EU bailout fund to keep its banks and economy afloat.
The exact figure on the banking sector's needs is crucial, given its large size relative to the Cypriot economy. Credit ratings agency Fitch said Friday that the banks' assets are worth four times the size of the country's €17.5 billion ($22.5 billion) economy.
While most of the bailout is expected to go to recapitalizing banks, around €7.5 billion will be channeled to refinancing the country's debt and cover fiscal shortfalls over the deal's four-year timetable.
Cyprus sought international aid in June to save its banking sector from collapse after banks failed to replenish huge losses they suffered on bad Greek debt and loans. The country has been unable to borrow from international markets for over a year because of its junk credit rating.
Three other euro countries have received international help with their debts — Greece, Ireland and Portugal. Separately, Spain has also been given a €100 billion loan facility to strengthen its banking sector.
Like the previous bailout recipients, Cyprus will have to commit to a range of spending cuts and tax increases. It is the terms of these austerity measures that the country and its international creditors have been thrashing out.
Cyprus government spokesman Stefanos Stefanou said the left-wing government had negotiated hard to safeguard key workers' benefits and to help the economy rebound from a projected contraction next year of 3.5 percent.
Speaking on state broadcaster CyBC, Stefanou said the road to a deal opened after the troika yielded to a Cypriot demand to invest part of future proceeds from offshore natural gas deposits instead of using all the money to pay off the loan.
Stefanou said the government got the troika to back off from putting profitable, state-owned companies up for sale. However, he said that could be re-examined if the country can't pay off its debt. Government workers will also get smaller, inflation-linked salary increases when the country gets out of recession and keep a year-end bonus salary.
Government workers' union boss Glafcos Hadjipetrou called public sector pay cuts of more than 15 percent for some employees "devastating" and "one-sided" but conceded Cyprus had little option but to negotiate a bailout with international lenders.
Cyprus' stock exchange rallied strongly on the expectation of a deal. It closed up 7.1 percent, slightly down on the 9.5 percent advance it had registered earlier.