* Cypriot bailout talks focus on deposit, interest taxes
* Outright losses on bank depositors effectively off table
* Euro zone finance ministers meet from 1600 GMT
By Jan Strupczewski and Annika Breidthardt
BRUSSELS, March 15 International lenders are
aiming to give Cyprus a bailout of close to 10 billion euros,
less than initially expected, with taxes imposed on Cypriot
bank depositors likely to fill the gap, officials said on
Euro zone finance ministers meet at 1600 GMT along with IMF
chief Christine Lagarde to discuss the bailout, mainly needed to
recapitalise the Mediterranean island's banks which were hit
hard by a sovereign debt restructuring in Greece last year.
The ministers might not reach a final decision on Friday,
officials said, because of the complexity of the issues
including the possible involvement of Russia, which has strong
business ties with Cyprus.
"We're going to take stock of the situation in Cyprus, hear
from the institutions ... we will see how far we will get," the
chairman of euro zone finance ministers Jeroen Dijsselbloem said
on entering the meeting.
The package is likely to contain a mixture of tax increases,
one-off revenue raising measures, plans for privatisations and
an overhaul of the banking sector to ensure Cypriot debt is
sustainable and Nicosia can pay back what it borrows.
Russia could help finance the programme by extending a 2.5
billion euro loan already made to Cyprus by five years to 2021
and potentially reducing the interest rate, which is now at 4.5
percent, officials have said.
Germany's Chancellor, Angela Merkel, underscored the
priority that was being given to solving the country's problems
at a news conference after a meeting of European Union leaders.
"To leave Cyprus up to it own devices and simply see what
happens would not be responsible, in my view," Merkel said.
Cyprus, with gross domestic product of barely 0.2 percent of
the bloc's overall output, applied for financial aid last June,
but negotiations were stalled by presidential elections in
Without emergency lending, Cyprus will default and threaten
to shatter the return of investor confidence in euro zone public
finances fostered by the European Central Bank's promise to do
whatever it takes to shore up the currency bloc.
RANGE OF TAXES
Cyprus originally estimated that it needed about 17 billion
euros - almost the size of its entire annual output - to restore
its economy to health. Up to 10 billion euros of that were
earmarked to recapitalise its banks and 7 billion required for
servicing debt and running general government operations.
But because a loan of that magnitude would increase its debt
to unsustainably high levels and call into question its ability
ever to pay it back, policymakers sought to reduce it by finding
more revenue sources in Cyprus itself.
Talks this week already cut the bailout to a range of 10-13
billion euros, which was in turn narrowed down to the lower end
in preparatory talks among technical experts on Friday.
"The Cypriot bailout will be close to 10 billion euros in
total," one euro zone official with insight into the
negotiations ahead of the ministerial meeting said.
For a final agreement, the International Monetary Fund, the
European Commission and European Central Bank need to present a
report on the state of Cyprus' banking sector, its economy and
One official said a report had been delivered by the troika
but orally, not in writing.
Cypriot Finance Minister Michael Sarris will travel to
Moscow for meetings on Monday, Cypriot diplomats said, raising
the possibility that an agreement on participation can be struck
with the Russians that would be included in a final deal.
The IMF has pushed the idea that depositors in Cypriot banks
should bear some of the costs of bailing out the island, a
process dubbed "bail-in". But that approach is rejected by
Cyprus, the European Commission and some members of the ECB.
In the preparatory talks ahead of the ministerial meeting,
the idea of bailing-in depositors lost support because it would
be legally difficult and carry the risk of weakening confidence
in banks across the euro zone, officials said.
Instead, support grew for imposing taxes on those holding
money in Cypriot banks. A tax on the total sum of depositors of
5 percent, for example, or a tax of 20-30 percent on interest
generated by the deposits would not threaten financial
stability, officials said.
Cyprus is also likely to raise its nominal corporate tax
rate and sell off state assets.
Plans are already being made for another meeting of euro
zone finance ministers next week, once the Cypriot finance
minister has returned from Moscow and a more precise idea of the
shape of the rescue deal has been formed.