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Cyprus' finance minister urged lawmakers Friday to approve a first batch of spending cuts and tax hikes agreed with international creditors by Dec. 13, when the other 16 EU countries that use the euro are expected to discuss a bailout deal.
Vassos Shiarly said the only element left to determine in the bailout accord with the 'troika' of the European Commission, the European Central Bank and the International Monetary Fund is how much cash troubled Cypriot banks need. The banks need to replenish their reserves after taking huge losses of around €4.5 billion ($5.84 billion) on bad Greek debt and loans.
Shiarly said that investment firm PIMCO and auditors Deloitte, which are currently assessing banks' needs, will issue a preliminary figure on Dec. 7, while the formal sum will be known by mid-January.
"As a result, you understand that there is an outstanding issue that will remain for some time until the final figure is issued. However, this doesn't stop us from completing the memorandum (bailout) to the greatest possible degree," Shiarly said.
Cyprus' Central Bank Governor Panicos Demetriades said Friday that amount won't exceed €10 billion ($12.99 billion). A leaked draft of the bailout accord said that "up to €10 billion is foreseen" for Cypriot banks which includes "potential future capital needs."
Cypriot officials, speaking on condition of anonymity because of the sensitivity of the issue, say that they believe the banks' recapitalization needs to be much lower, closer to €7 billion ($9 billion).
The size of the bailout for the crisis-stricken country is estimated at between €14.5-17.5 billion ($18.8-22.7 billion) which includes 7.5 billion to cover the country's financing needs and fiscal shortfalls over the agreement's four-year duration between 2013-16.
Cyprus, with a total economic output of €17.5 billion ($22.7 billion), sought international aid in June to save its teetering banks and to pay its bills after being shut out of international markets for a year because of its junk credit rating. The country will see its economy shrink this year by 2.4 percent of GDP and 3.5 percent in 2013. Unemployment will peak at over 14 percent in 2014 before it starts to recede, the finance ministry said.
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.
Cypriot lawmakers will vote on the initial round of austerity measures once debate on the 2013 budget wraps up at the end of next week.
The 30-page accord — leaked almost immediately Friday after Shiarly said that the troika had authorized its release to party leaders and lawmakers for study — shows that the Cyprus government needs to achieve a primary surplus of 4 percent of gross domestic product by the end of 2016.
To achieve that, authorities need to cut spending and raise revenue by a total 7.25 percent of GDP and needs to start doing so right away by making €42 million in cuts by the end of this year.
Spending cuts primarily target the bloated public sector which absorbs a sizeable chunk of all government spending. According to the bailout terms, government workers making over €4,000 monthly will see their salary rolled back by 12.5 percent, while allowances will be cut by 15 percent. Government workers will also pay more into their pensions which will be taxed.
Government handouts such as a mothers and students allowance will also get the chop.
State officials will also see some long-standing perks disappear, including the right to travel first or business class, as well as duty free cars.
A salary freeze will stay in place over the next for years, while inflation-indexed pay rises that the government previously doled out twice-yearly will be suspended until 2016.
The government workforce will shrink by 5,000 through such measures such as hiring one person for every four retirees.
On the revenue-raising side, property taxes will increase as well as a bank levy on deposits from 0.095 percent to 0.11 percent. Tobacco, beer and spirits will also see hefty tax hikes, as will motor fuel. The general sales tax will jump from 17 to 19 percent.
The retirement age will increase by two years to 65 and may increase further depending on a review of life expectancy numbers every five years. A penalty will be imposed on early retirement to discourage it.
The agreement doesn't call for immediately selling off state-owned enterprises, but that could happen if the country's debt is deemed unsustainable.
Regarding the country's new-found offshore natural gas deposits, the deal says potential revenue must be split between developing the nascent gas industry, paying down the debt and setting aside a portion for future generations.