Jeroen Dijsselbloem, who chairs the ministers' meetings, on Wednesday called an extraordinary session for Friday in Brussels to discuss the rescue loans for the cash-strapped country. Auditors have estimated Cyprus will need as much as €17 billion ($22 billion), more than half of which would go to shore up its banks, which took huge losses on Greek debt.
But the the "troika" of creditors — the European Commission, the European Central Bank and the International Monetary Fund — is only willing to lend Cyprus around €10 billion because of doubts over the country's ability to repay its loans, Cypriot officials said. A sum of €17 billion would be equivalent to the size of the country's entire economy.
"That's why they tell us, we won't give you €17 billion but less, around €10 billion," Nobel Laureate and presidential advisor Christopher Pissarides was quoted by online Cypriot financial website Stockwatch as saying to state broadcaster CyBC on Tuesday.
Dijsselbloem's spokeswoman, Simone Boitelli, says it is too early to gauge whether the ministers will make a final decision on the bailout at the meeting. She says the "troika" will report back on negotiations with the new Cypriot government. Ministers are aiming to finalize the bailout package by the end of the month.
Cyprus' president said the current round of talks with the troika is showing signs of progress. Nicos Anastasiades urged patience, saying it will soon become clear that "hard work produces good results."
Cobbling together the accord quickly is crucial for Cyprus because it only has money to pay its bills until May. The longer the negotiations drag on, the greater uncertainty lingers over the country's financial system, prompting depositors to pull their cash out of Cypriot bank accounts.
According to figures released by the Cyprus Central Bank, bank deposits dropped from €70.15 billion to €68.42 billion between December and January. The danger is that withdrawals accelerate if the uncertainty over Cyprus' financial future is not lifted soon.
One of the key questions at the eurozone meeting on Friday will be how to make up the shortfall between what Cyprus needs and what the troika is willing to offer.
Cyprus' government spokesman, Christos Stylianides, ruled out forcing bank bondholders or depositors to share in the cost of the bailout or cutting wages and pensions beyond what has already been agreed in a preliminary bailout deal.
Some help may come from Russia, since many investors and depositors in Cypriot banks are Russian. Finance Minister Michalis Sarris will travel to on Monday to meet his Russian counterpart, Anton Siluanov.
Cyprus has been trying to get longtime ally Moscow to agree to a five-year repayment extension on a low interest, €2.5 billion loan it received two years ago, when it could no longer borrow from international markets. The previous Cypriot government also tried unsuccessfully last year to secure another €5 billion loan from Russia.
Top Cypriot officials, however, have said in January that Russia was ready to contribute to a rescue package.
Besides the overall size, the bailout deal has yet to finalize key policy conditions, such as increases to business and bank taxes that Cyprus had carefully guarded, in exchange for the rescue loans.
Pissarides said Cyprus would accept raising its low 10 per cent corporate tax rate to help pay back any loan, but only as long as further increases are ruled out for years to come so that companies aren't discouraged from setting up business.
A Cypriot finance ministry official, who spoke on condition of anonymity because he wasn't authorized to speak about the negotiations, said another idea being considered is raising the tax on interest earned from bank deposits.