Cyprus will have to seek bailout funds from the European Union to recapitalise a banking sector pummelled by exposure to Greek debt and must prepare by taking tough steps to shore up its finances, the chairman of the country's second-largest lender said today.
The comments by Cyprus Popular Bank's Michalis Sarris further bolster a growing sense that the island will be the next in line to ask for help from the European Financial Stability Facility. Other top Cypriot officials also have recently left the door to a bailout open.
Sarris is a former finance minister who helped steer Cyprus' adoption of the euro in 2008. The bank he now leads is the Cypriot lender most exposed to risk from Greek debt.
Cyprus Popular Bank posted a record 2.54 billion euro (£2.05 billion) loss last year after taking a 76% write-down on its Greek government bond holdings.
Sarris said there is no longer a stigma attached to asking for EU bailout cash, but added that if Cyprus turns to the EU bailout fund, it should have a convincing plan to cut spending so it can avoid being forced to impose much tougher austerity measures later.
"We will have to seek some sort of support, and the more orderly fashion that it's done in, the better it is for everybody," Sarris said.
"What I do expect over the next few weeks, we will put a programme together, we will discuss it with our European partners, and I think in exchange we will get the support that is needed to really put some credibility behind the pledge of the government to help the banks through this difficult time."
He said the government needs to balance its books by trimming a huge public sector that takes up around a third of the country's 18 billion euro (£14.5 billion) budget and increase competitiveness by retooling automatic pay raises that are calculated according to inflation. He said the same applies to banks' operating costs.
Taking firm action now - including even jacking up the relatively low sales tax of 17% - would help safeguard the country's low 10% corporate tax that underpins its large service sector, Sarris said.
Sarris said Cyprus could avoid the fate of Greece, where the government has slashed public sector salaries and pensions and imposed repeated tax hikes over the past two years in return for billions of euro in rescue loans from other eurozone countries and the International Monetary Fund.
The measures have left Greece in a fifth year of recession, while also sparking a political crisis as voters have soured on austerity-backing parties.
The key is convincing the public that some painful measures must be taken now to avoid far more painful ones later, Sarris said.
"Compared to what others had to do, we are very far from (cutting all the way to) the bone, we will be cutting fat and this is something others wish they had the opportunity to do," he said.
The Cypriot government is cobbling together a fresh package of spending cuts, but President Dimitris Christofias said last week that it would not come at the expense of workers' salaries and benefits.