Cyprus said on Friday it would help its Greek-exposed banks to boost their capital if their own efforts fall short, but acknowledged that its capacity to assist was constrained by the country's own fiscal difficulties.
Finance Minister Kikis Kazamias said support to the banks could be extended only after they have made exhaustive efforts to raise fresh capital themselves, which should include disposal of non-core assets and cutting salaries and dividend payouts.
There has been growing speculation that Cyprus, which represents just 0.2 percent of the euro zone economy, could need a bailout to ease the burden of its bank's exposure to Greece, fiscal difficulties which have been gradually mounting and a loss of access to international capital markets.
I want to stress that any recourse to the European support mechanism is for us the very last resort and efforts must be made to avoid that, Kazamias said in a prepared text of remarks at an economic conference in Nicosia.
Cypriot banks must increase their core tier 1 capital to more than 9 percent by June 2012. Preliminary assessments by the European Banking Authority suggest it will require them to raise 3.6 billion euros -- about 20 percent of Cyprus's GDP -- though the final figure could be considerably less, the Central Bank said last week.
Kazamias said banks should issue shares, cut spending and dispose of non-core assets.
At a second stage, and only if banks exhaust all their options and cannot raise the requisite capital will the state, upon advice from the Central Bank, intervene, even though the present capabilities are limited, Kazamias said.
Cyprus has been struggling to buffer itself against the impact of its banks' exposure to Greece, seen at risk of a sovereign debt default, and credit ratings cuts which have caused yields on its bonds to spike, effectively shutting it out of capital markets.
It recently signed a 2.5 billion euro bilateral loan with Russia, which will cover refinancing requirements next year.
Kazamias forecast gross domestic product growth for Cyprus of 0.5 percent this year - a revision upwards of previously forecast stagnant growth, and 0.2 percent in 2012. The economic impact of an explosion which destroyed its largest electricity station this year was not as profound as initially thought, he said.
He also offered lower fiscal deficit projections; saying the shortfall would hover slightly under 6.0 percent of GDP in 2011 from an earlier range of 6.5-7.0 percent.
Cyprus, he said, was committed to keeping its deficit within 3.0 percent of GDP next year and would aspire to have a balanced budget in 2014.
(Reporting By Michele Kambas; Editing by Catherine Evans)