Troika starts probe into Cyprus finances

Potential creditors from the IMF, the EU and the ECB started trawling through Cyprus?s finances on Tuesday to assess how much emergency aid the recession-hit eurozone minnow may need after being hammered by exposure to Greece.

Two teams from the trio, collectively known as the troika, met separately with the Central Bank and Finance Ministry on Tuesday, officials from both institutions said.

Cyprus sought a financial lifeline from EU rescue funds last week to help support local banks crippled by their losses on Greek bonds.

The total amount Cyprus may require is still unclear, but it faces a virtually guaranteed bill of 2.3 billion euros for its two main banks. There is speculation the bailout could cost as much as 10 billion euros — more than half the size of Cyprus?s 17.3-billion-euro economy.

Cyprus?s finance ministry said the troika would also meet with labor and employer groups and management teams of the largest credit institutions.

?This visit is purely exploratory in nature and there will be no negotiation or discussion of (economic) measures,? the ministry said in a statement.

Cypriot authorities say the island?s low-tax status, which has attracted thousands of foreign companies, will not be part of negotiations.

But other issues, such as a public payroll representing 33 percent of annual state spending and wage indexation blamed for second-round inflationary effects were expected to be in the troika?s sights.

In a report last year, the IMF said Cyprus needed to make spending cuts and contain a public sector wage bill which, at 15.4 percent of GDP, was the highest in the eurozone, it said.

Any troika recommendations would be a delicate balancing act because of the potential dangers of enforcing austerity during a recession, economist Fiona Mullen said.

The Cypriot economy, which represents 0.2 percent of the eurozone, has recorded negative rates of growth for the past three quarters.

Cyprus is also struggling with record-high jobless rates of 10.8 percent. That was reflected by a 9.5 percent jump during 2011 of its ?social transfers? bill, which includes unemployment benefits.

?I?m sure that with figures like this government finances are doing worse,? Mullen said. ?It is therefore important that they come to an agreement with the troika very fast.? The IMF and EU mission ends on July 6. [Reuters]

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