Cyprus banks need up to €8.86bn

The Greek-exposed banking system of Cyprus needs up to nine billion euros as part of an EU bailout to save the island from bankruptcy, a report said Friday. The official CNA news agency said a due diligence review by US consultancy Pimco put the amount for bank recapitalisation at 8.86 billion euros ($11.71 billion), based on an adverse scenario. The government argues international lenders should adopt Pimco's baseline scenario -- reported to be 5.98 billion euros -- as it would ease the terms of the loan. But a Pimco document leaked in the Cypriot media this week showed the US firm expects the island's economy to worsen as it slides deeper into recession. Its adverse scenario predicts higher unemployment, bigger wage cuts and falling property prices -- which all have a knock-on effect on people's ability to pay bank loans. "We do believe it reasonable to expect significant wage reductions for public sector workers which could have a material impact on borrowers' ability to meet debt service payments," Pimco said in a leaked letter to the Central Bank. The bank said it "strongly disagreed" with the methodology Pimco used to discount future bank revenue inflows. "The central bank supports the speedy signing of a draft memorandum as agreed with the troika as prolonged uncertainty harms the economy, especially the financial system," it said. Pimco submitted its report this month but the Central Bank said the amount would not be made public until it signs a bailout with the European Commission, the European Central Bank and the International Monetary Fund. Its review covered Bank of Cyprus, Cyprus Popular Bank, Hellenic Bank and a sample representing about 63 percent of the cooperative credit institutions, as well as Alpha Bank Cyprus and Eurobank Cyprus. In a draft agreement with the troika of lenders, the amount for the banks had been set at up to 10 billion euros as part of a total package which could reach 17 billion euros -- matching the island's GDP. The degree of bank recapitalisation determines whether Cyprus needs to adopt harsher austerity measures, and to pay back such a loan, it would have to start privatising utilities which it is loath to do. The European Commission on Friday issued its winter forecast predicting the Cyprus economy will shrink 3.5 percent in 2013 from a contraction of 2.3 percent last year. "Projections of the economic outlook for 2013 and 2014 point to a prolonged recession, due to further declines in domestic demand and investment activity," said the report. It said the economy would continue to shrink until 2016 and stressed financial aid for the eurozone member was imperative. "The conclusion of a macro-economic adjustment programme would be of paramount importance in stabilising the economy, but risks would remain on both the external environment and the domestic front," said the commission. Eurogroup finance ministers are expected to agree on a rescue deal for Cyprus in March. Nicosia applied for EU financial aid in June when its two largest banks -- Bank of Cyprus and Popular Bank -- asked for financial assistance, but talks have dragged on. Cyprus has pushed through harsh austerity measures of around 1.2 billion euros in tax hikes and savings, but fellow EU partners have called for more reforms. Concerns have been raised -- mainly by Germany -- about the island's enforcement of anti-money laundering laws. Nicosia says it has done everything asked of it under the preliminary agreement with the troika.