Cyprus needs to agree terms for a bailout “without delay” so it can benefit from improved euro-area economic governance and direct bank recapitalizations, Central Bank of Cyprus Governor Panicos Demetriades said on Tuesday.

The European Stability Mechanism could directly recapitalize troubled lenders in the euro region as early as next year, Demetriades said in the e-mailed transcript of a speech in Larnaca, Cyprus.

The prospect of direct ESM aid to its banks is one reason why Cyprus’s debt can remain sustainable after a bailout, said Demetriades, who is also a European Central Bank policymaker.

Cyprus, whose banks took large losses from Greece’s sovereign debt restructuring this year, became the fifth of the euro area’s 17 member states to seek a bailout in June as its biggest lenders, Bank of Cyprus Pcl and Cyprus Popular Bank Pcl, sought government support.

Its officials are in talks with the so-called troika of the European Commission, the ECB and the International Monetary Fund on the size of the rescue.

“Our country has to as soon as possible carry out all the necessary reforms so that it can enjoy the benefits of strengthened economic governance in the eurozone,” Demetriades said.

Recent “scaremongering” about the increase in bank capital ratios demanded by the troika doesn’t serve the interests of the Cypriot economy, Demetriades said.

[Bloomberg]