Cyprus' potential international creditors said Friday they have made "good progress" in negotiations on a possible bailout for the crisis-hit country.
Despite earlier hopes that a deal was imminent, they said long-distance talks would continue on securing an agreement that will make Cyprus the fourth euro country to receive international help with its debts.
Representatives from the so-called troika of the European Commission, the European Central Bank and the International Monetary Fund said they are awaiting the preliminary results of an investigation into how much Cyprus' ailing banks will need to shore up their finances.
This will help determine the size of a bailout that won't push the country's debt to unsustainable levels.
"Discussions are expected to continue from respective headquarters with a view to making further progress toward a potential program," a troika statement said.
In its own statement, the Cypriot government said it had reached "a convergence" on proposals that will make up the bailout agreement. It said the preliminary estimate on the banks' recapitalization needs which is expected in early December will move negotiations forward so that Cyprus' euro partners can rubber-stamp a bailout accord when they meet next month.
The exact figure on the banking sector's needs is crucial, given its large size relative to the Cypriot economy.
Credit ratings agency Fitch said Friday that the banks' assets are worth four times the size of the country's €17.5 billion ($22.5 billion Cdn) economy.
'Decisive progress' made
The Cypriot government said parliamentary approval from eurozone member countries is expected to come at the end of January when Cyprus will be able to draw the cash it needs from the EU bailout fund to keep its banks and economy afloat.
It also said Cypriot President Dimitris Christofias would soon address the nation on the bailout deal.
The European Union's monetary affairs commissioner Olli Rehn welcomed the "decisive progress" made in bailout talks.
"I consider this an important step toward full agreement on an assistance program for Cyprus which can be finalized once the interim results of the due-diligence exercise are known and after agreement by the eurogroup," Rehn said in Brussels.
Cyprus sought international aid in June to save its banking sector from collapse after banks failed to replenish huge losses they suffered on bad Greek debt and loans.
The size of the bailout is estimated to range between €14-17.5 billion ($18-22.5 billion). Most of that is expected to go to recapitalizing banks, while around €7.5 billion will be channeled to refinancing the country's debt and to cover fiscal shortfalls over the deal's four-year implementation timetable.
Economy expected to shrink by 3.5%
Cyprus, which is one of 17 EU countries to use the euro, has been unable to borrow from international markets for over a year because of its junk credit rating.
Three other euro countries have received international help with their debts — Greece, Ireland and Portugal.
Separately, Spain has also been given a €100 billion loan facility to strengthen its banking sector. Like the previous bailout recipients, Cyprus will have to commit to a range of spending cuts and tax increases.
It is the terms of these austerity measures that the country and its international creditors have been thrashing out.
Cyprus government spokesman Stefanos Stefanou said the left-wing government had negotiated hard to safeguard key workers' benefits and to help the economy rebound from a projected contraction next year of 3.5 per cent.
Speaking on state broadcaster CyBC, Stefanou said the road to a deal opened after the troika yielded to a Cypriot demand to invest part of future proceeds from offshore natural gas deposits instead of using all the money to pay off the loan.
Stefanou said the government got the troika to back off from putting profitable, state-owned companies up for sale.
However, he said that could be re-examined if the country can't pay off its debt.
Government workers will also get smaller, inflation-linked salary increases when the country gets out of recession and keep a year-end bonus salary, but that will be offset by steep wage cuts.
Government workers' union boss Glafcos Hadjipetrou called public sector pay cuts of more than 15 per cent for some employees "devastating" and "one-sided" but conceded Cyprus had little option but to negotiate a bailout with international lenders.
The overriding sense in the country at news of an impending bailout agreement was one of relief that it would deliver a needed cash infusion to get the economy moving again.
"The fact that we've reached a point where we feel some sort of satisfaction because a memorandum is being signed illustrates how difficult things became for our economy which hung by a thread," said Averof Neophytou, deputy leader of the main opposition DISY party.