Cypriot Finance Minister Vassos Shiarly said senior creditors won’t be forced to take losses in a proposed rescue of the country’s banks.

Only junior bondholders will face losses in the bailout of Cyprus’s lenders, which may need about 10 billion euros of fresh capital, Shiarly said in an interview in The Hague late Thursday. Senior creditors and depositors won’t be touched, he said after meeting with Dutch lawmakers.

“The recapitalization of the banks includes the bailing-in of bondholders,” Shiarly said. The terms of the bank rescue are under consideration as authorities await a final report from Pacific Investment Management Co. on Cypriot lenders’ capital needs. “But I think it concluded as a matter of principle the bailing-in of junior bondholders,” he said.

Cyprus is negotiating with the European Commission, European Central Bank and International Monetary Fund over the size and terms of a rescue for the government and lenders weakened by their exposure to the Greek economy.

Cypriot financial institutions such as Bank of Cyprus Plc and Cyprus Popular Bank Pcl (CPB) lost more than 4 billion euros in a debt restructuring that was part of a second rescue of Greece.

Most junior bondholders are individuals in Cyprus, Shiarly said. “There’s been a lot of discussion and an association has been formed to lobby against the bail-in,” he said. “Unfortunately it’s a necessity.” There has been no talk of imposing losses on depositors, he added.

Pimco report

The Pimco report may be ready as soon as Friday and an agreement on an aid package may be concluded in March, Shiarly said. Cyprus’s bailout may amount to 17.5 billion euros, of which the government would get as much as 7 billion euros to pay its bills and refinance debt, he said.

“We borrow the money to recapitalize the banks, this means a nationalization,” Shiarly said. He said the banks will later be sold, with the proceeds used to reduce the national debt.

Shiarly reiterated Cyprus’s hope that its banks will eventually qualify retroactively for direct aid from the European Stability Mechanism, the euro area’s permanent rescue fund, allowing the loans to be moved from the sovereign balance sheet to the banks.

“Our banks will be recapitalized outside this process, through government lending, but we would very much like to have it,” he said. “Whether it’s going to be available or not will depend on a political decision taken at that particular point in time.”

Letter to Barroso

Cypriot President Demetris Christofias appealed for retroactive direct bank aid in a Jan. 11 letter to European Commission President Jose Barroso.

“We’ve done everything that was requested,” Shiarly told lawmakers in The Hague of his country’s efforts to obtain a bailout. “We are very understanding of sensitivities in certain areas. We will leave it to them. We don’t put pressure on our partners.”

Shiarly said so-called private-sector involvement has been ruled out on Cypriot government debt in bailout talks with the euro area and IMF.

“Government debt is primarily held by local credit institutions, and therefore if you’re going to do PSI, you’ll have to pay for it at the same time by asking for more money to cover recapitalization,” he said.

Shiarly also said that he’s confident a 2.5 billion-euro loan from Russia due in 2016 will be extended soon.

‘In everyone’s interest’

“We have every reason to believe Russia will respond favorably,” Shiarly told reporters. “I believe soon, but it is not up to us. It should be extended; it’s in everyone’s interest.”

After the Cypriot economy’s exposure to Greece hampered the eastern Mediterranean island’s ability to get funding, “Russia was the only country willing to lend to us,” Shiarly said.

Christofias said Jan. 30 that Russia was prepared to contribute to a bailout of Cyprus in cooperation with the European Union. He said Russian President Vladimir Putin assured him in a telephone conversation that Russia was prepared to participate in loans to Cyprus.

[Bloomberg]