Nicosia came under mounting domestic and European pressure on Tuesday to push through an austerity package in order to obtain aid for its banking system and to keep payments from the government flowing.
The Cypriot government?s room for maneuver narrowed when Moody?s Investors Service downgraded its credit rating and euro-area finance ministers pressed for a rapid conclusion of more than three months of bailout negotiations.
?Should the government continue with its procrastination and lack of resolve, we risk a payment stoppage and a collapse of the banks that would spark a domino effect for the economy,? Nicholas Papadopoulos, a lawmaker from the center-right DIKO party who heads the Parliament?s finance committee, said by telephone on Tuesday.
Cyprus in late June became the fifth euro-area nation to request a financial rescue since a 2010 bailout of Greece.
The government is in talks with the European Commission, European Central Bank and the International Monetary Fund, the so-called troika, to fix the size of the bailout, which will encompass banks weakened by their exposure to the Greek economy as well as the public sector.
The government estimates that the country?s banks, which lost more than 4 billion euros in Greece?s debt restructuring, need 5 billion euros of fresh capital, three people with direct knowledge of the matter said last week.
The troika puts lenders? needs at about 10 billion euros, they said.
Moody?s said its cut in Cyprus?s bond rating to B3 from Ba3 with a negative outlook reflected the ?profound difficulties? in the country?s banking sector, reeling from the European-imposed write-down of Greek debt.
Finance Minister Vassos Shiarly (photo) disputed the troika?s calculation of Cypriot banks? recapitalization requirements.
?We have a difference of opinion as to the approach used,? he said in an interview on Tuesday in Luxembourg.
?The troika have their own way of computing their figures. They are not wrong; they are just working on the conservative side, on a safe approach because they might need more.?
In aid talks under way since June 25, Cyprus has offered to spread 1.02 billion euros in budget reductions over four years, making shallower cuts than the 975 million euros in three years sought by the troika.
European governments are trying to piece Cyprus into a matrix of aid programs that now cover Greece, Ireland, Portugal and Spain.
Luxembourg Prime Minister Jean-Claude Juncker, who heads meetings of euro-area finance ministers, said on Monday the government is not moving fast enough.
?We have the impression at the moment that the Cypriots aren?t reacting to this adequately,? Juncker said.
?We unanimously felt there is a need to accelerate work.?