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• Cyprus capital controls to be "loose" but island-wide

Central Bank governor Panicos Demetriades was told yesterday the recapitalisation needs of the banks were closer to 10 billion euros

INTERNATIONAL lenders have turned up the heat, asking Cyprus to raise its corporate tax and introduce a levy on capital gains and a financial transaction tax to ensure it can repay a bailout, eurozone officials said. 

And during a meeting with the Central Bank governor yesterday, the International Monetary Fund (IMF) reportedly rejected the figure needed for bank recapitilisation as too optimistic, putting even more pressure on the government.

One Brussels-based official, briefed on the talks between the IMF, the European Central Bank and the European Commission - known as the troika - and the government in Nicosia, said no decisions had yet been taken on any of the taxes. 

"All these options are on the table now, but there is no agreement yet," the official said. 

The capital gains tax could be introduced only temporarily, for three years, and provide the government with an extra revenue of 200-300 million euros. 

The nominal corporate tax, which now stands at 10 per cent, could be raised to 12.5 per cent, officials said. 

The introduction of the financial transaction tax (FTT), which will be applied by 11 eurozone countries from next year, is a troika idea that Cyprus strongly opposes, perhaps more than raising the corporate tax.

The tax would be set at 0.01 per cent of the value of trades for derivatives and 0.1 per cent for stocks and bonds.

Insiders suggested that this would have a negative impact on bank operations and greatly affect state revenues as foreign clients would opt not to carry out transactions through Cyprus.

Lenders also want Cyprus to privatise state companies.

Cyprus needs up to €17 billion in emergency loans, mostly to recapitalise its oversized banking sector, but also to service debt and government expenses. 

The bulk of that money would be earmarked for bank recapitalisation.

Investment firm Pimco that carried out an audit on bank portfolios has reportedly determined that banks would need €8.86 billion under an adverse scenario and €5.98 billion according to a baseline scenario.

However, a source told Cyprus News Agency that during a meeting between Central Bank governor Panicos Demetriades and the heads of the troika mission, the IMF representative disputed Pimco`s adverse scenario as too optimistic.

Instead, the IMF representative insisted on their own estimate of a capital shortfall of €10 billion. 

This figure was included in the Memorandum of Understanding agreed between the Troika and the Cypriot authorities on November 29, 2012.

According to the same source, the troika cited the fact that unemployment in Cyprus already reached 14.7 per cent whereas for the purposes of the due diligence review in the adverse scenario Pimco used an unemployment rate of 14.6 per cent.

Cyprus has been trying to convince lenders for banks to be recapitalised under the baseline scenario and a credit line to be extended to cover possible needs in the next three years.

In what could be a welcome relief for eurozone taxpayers suffering bailout fatigue, officials said Cyprus received signals from Russia, which has strong business ties with Nicosia, that Moscow could consider contributing to the bailout if it got the same credit status as eurozone lenders - meaning it would get repaid right after the IMF. 

"It is likely to happen," one official familiar with the bailout talks said. 

Officials also said that Russian investors were interested in buying a majority stake in Cyprus Popular Bank and increasing their holdings in Bank of Cyprus - the two biggest banks on the Mediterranean island. 

President Nicos Anastasiades is to travel to Russia to meet President Vladimir Putin in the coming weeks to discuss possible Russian help, officials said.

He will seek a five-year extension of an existing Russian loan to Cyprus of €2.5 billion that matures in 2016 as well as a reduction in the 4.5 per cent rate of interest. 

Officials said Cyprus had asked for a reduction of the interest by 1.5-2.0 points. 

Eurozone finance ministers pledged this week to agree a bailout for Cyprus by the end of March, but details of how the rescue will be financed are yet to be sorted out. 

German officials, backed by the Netherlands and Finland, have pushed for depositors in Cypriot banks, many of whom are Russian and British business people, to help pay for the cost of the rescue, a process known as a "bail-in". 

The government has said that a depositor haircut was not up for discussion.

Figures released last week showed a little over 2.0 percent of total deposits was withdrawn in January, although officials say there has since been a return of capital. 

But Cyprus fears any "bail-in" will spark the rapid withdrawal of funds from the island and undermine its entire business model, making the economic situation even worse. 

Experts have warned that this could spark panic across the eurozone.

European Central Bank President Mario Draghi is pressuring decision makers to agree on a financial aid package for Cyprus.

“Cyprus is a small economy, but the systemic risks may not be small,” he said. Yet the right balance has to be found to make sure the country’s debt is sustainable once it receives a bailout. “Our Union is not a transfer Union,” he said.