The tiny island nation of Cyprus may require a bailout from the Eurozone unless the government quickly enacts significant tax hikes and spending cuts, warned finance minister Kikis Kazamias.

According to media reports, Kazamias wants to freeze the salaries of public sector workers for two years, in an effort to save 355 million euros ($479 million). He also seeks to introduce a scaled surtax on private sector salaries above 2,500 euros and impose an additional levy of 0.5 percent on domestic company turnover.

The Nicosia government has already enacted an 840-million euro ($1.14-billion) austerity package as part of its 2012 budget.

The new measures are expected to be opposed by the country’s powerful trade unions.

According to the Cyprus Mail newspaper, the head of PASYDY, the government workers union, said that the public sector was not to blame for the financial crisis and that the state should seek to eradicate tax evasion. He added that workers had already made too many concessions.
“This cannot go on indefinitely,” union boss Glafkos Hadjipetrou told state broadcaster CyBC.

In August, PASYDY reluctantly agreed to a government request that public workers contribute between 1.5 and 3.5 per cent of their gross monthly income (for those making more than 1,500 euros) for two years in order to alleviate the financial crisis.

Now, some union officials want to rescind that agreement.

On Friday, Kazamias emphasized that Cyprus needs to restore its financial credibility so it can continue to attract foreign investments. Cyprus has already endured a series of credit downgrades from the world’s three principal credit ratings agencies.

“The government is considering a two-year wage freeze as part of a wider fiscal consolidation package that will help Cyprus’s economy regain its credibility so that the country can enjoy effective access to international markets,” Kazamias told reporters in Nicosia on Friday.

“Otherwise, it should be regarded as certain that the country will have to resort to the European Union rescue mechanism.”

Kazamias further warned that the only thing keeping Nicosia from seeking financial aid from the Eurozone was the partial refinancing and short-term financing from local banks and a 2.5 billion euro ($3.4 billion) loan from Russia.

“If the situation is not reversed soon (and much worse, if new downgrades follow that will bring Cyprus in the non-investment grade) then Cyprus will soon be led to an increased need of resorting to the EFSF [European Financial Stability Facility] in order to cover its financing needs,” he wrote in a memo.

Hadjipetrou countered that the country’s financial problems were exacerbated by its exposure to Greek debt, and that, even if Nicosia could erase the deficit, the nations would still have faced a credit downgrade.

Stefanos Stefanou, a spokesman for the Cypriot government, said in a statement: “All should contribute to tackling the problems caused by the global economic crisis.”

The outlook for Cyprus – which joined the euro in 2008 – is rather bleak.

Kazamias expected Cyprus’ economy to show anemic growth of 0.5 percent this year and only 0.2 percent next year.