UPDATE 1-Cyprus dismisses bank deposit haircut talk as "stupid"

Fri Mar 1, 2013 2:49pm GMT

By Michele Kambas

NICOSIA, March 1 (Reuters) - Cyprus's new finance minister on Friday ruled out a haircut, or imposed losses, on bank deposits to ease a financial bailout from international lenders, now stalled amid worries about debt sustainability.

"Really and categorically - and this doesn't only apply in the case of Cyprus but for the world over and the euro zone - there really couldn't be a more stupid idea," Michael Sarris, who took over his post on Friday, told reporters.

Sarris, a widely respected economist, was the first appointment of new Cypriot President Nicos Anastasiades, who won presidential elections on Feb. 24 on a platform of constructively attempting to seek a deal with lenders.

Cyprus's bailout request, on hold for the past eight months, will be discussed at a meeting of euro zone finance ministers in Brussels on Monday. Euro zone officials say they expect a conclusion by the end of March.

Scenarios have been floated in recent weeks over how Cyprus, one of the euro zone's smallest economies, could ever afford to repay a bailout bill which could reach 17 billion euros, almost the same size as its economy.

One of the reported options under discussion is for those holding deposits in excess of 100,000 euros in Cypriot banks to take a loss if their bank is wound down, in order to scale down the oversized Cypriot financial sector.

Cyprus, which has built its economic model as a business centre with one of the lowest corporate tax rates in Europe, has been adamant that idea will never fly.

"I really don't know where it is coming from," said Sarris, a former World Bank economist who ushered Cyprus into the euro zone under a previous term as minister from 2005 to 2008.

He said the speculation was linked to attempts to make debt sustainable, but said there were other ways to handle the bailout bill.

Asked whether he was in favour of privatisations, he said: "I think a lot of state enterprises are problematic. Changes are needed, but I think time is needed for it to be done properly. A strategic investor could help."

Under terms of a draft bailout deal reached with Cyprus's previous communist government, authorities should consider a privatisation programme for state owned companies if necessary to ensure debt sustainability.

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