Cyprus finance minister sees smaller than expected 2013 GDP drop

By Marc Jones

LONDON (Reuters) - Cyprus's finance minister said an expected contraction in the island's economy after this year's international bailout would be less severe than expected by the country's lenders.

Speaking to Reuters on Tuesday during a six-hour trip to London, Harris Georgiades said the impact of austerity measures imposed by the European Union as a condition of the bailout was overdone and the country's banks would not need additional aid.

The rescue by a group of international lenders known as the troika saved Cyprus from bankruptcy and was the first in the euro zone crisis to see the savings of firms and richer individuals seized to prop up damaged banks.

Georgiades said Cyprus's economy had proved more resilient to the upheaval than expected and had received a small lift from an uptick in the euro zone economy.

"Despite the difficulties and the magnitude of the decisions we have taken, at all levels we are doing much better than expected," Georgiades said.

This year's economic contraction "will be 2 percent less than assumed... I think it's going to be 7 percent," he said. "Our efforts on the fiscal dimension remain firmly based on very, very conservative assumptions... more conservative than the troika assumptions. We want to be on the safe side."

The troika expects a 3.9 percent economic contraction next year.

Cyprus was close to financial collapse when the 10 billion euro (8.45 billion pounds) aid deal was agreed in March. It still has capital controls in place to prevent individuals and companies from emptying their accounts.

Georgiades said the government would stick to its current tactic of gradually removing the capital restrictions and promised that, with cash remaining from its rescue deal, there would be no need for further bank aid.

"I do not foresee that any of the banks will need more capital," he said. "Cyprus now has a well capitalised banking system."

Rating firm Moody's said on October 3 that the island could need another 1.5 billion euros to cope with a rise in bad loans at its banks as the economy shrinks, on top of the 2.5 billion that has already been earmarked.

REUNIFICATION PROSPECTS

In a pre-interview presentation, Georgiades said the government had drawn up plans to give banks state-backed guarantees that could be used to get ECB funding if massive sums were withdrawn once the capital control are loosened.

He pointed to Bank of Cyprus, which he said had growing non- performing loans but had cut emergency funding from the European Central Bank to 9 billion euros from 11 billion since March.

He brushed away questions on whether Cyprus would sell gold reserves and said full privatisations of state-owned electricity and telecom networks and ports were not the only way the government could pull together the 1.4 billion euros needed to fulfil its commitments to the troika.

Creating joint-stock companies were one option, he said, while added that, "there will be lots of opportunities to invest in Cyprus in the next few years".

Georgiades said the government was still committed to talks with Turkey to end the decades-old division of island.

Cyprus has been split into Greek and Turkish parts since a Greek Cypriot coup was followed by a Turkish invasion of the north in 1974.

Turkey has around 30,000 troops in the north and is the only nation to recognise the self-declared Turkish Republic of Northern Cyprus, but this month it said there was a "window of opportunity" to end the division.

Diplomats are optimistic that talks can resume soon, but successive U.N.-backed peace efforts have floundered and reunification talks are now stalled over issues ranging from disputes over sovereignty to property claims and future territorial adjustments in a reunited island.

Georgiades suggested a deal might be sealed before 2014 - "so long as actions match words".

"The foreign minister has said March... I would say we can even do it by Christmas," Georgiades said. "We are absolutely ready to have a serious dialogue with Turkey."

But he said it did not help that Turkey was still drawing maps on which Cyprus did not "even exist".

(Additional reporting by Michele Kambas in Nicosia; Editing by Tom Pfeiffer)