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Cyprus faces "very unfavorable" outlook in near term: Sarris

Cypriot Finance Minister Michael Sarris (front) walks at a hotel lobby after arriving from the Russian Finance Ministry headquarters in Mosc
Cypriot Finance Minister Michael Sarris (front) walks at a hotel lobby after arriving from the Russian Finance Ministry headquarters in Mosc

By Michele Kambas

NICOSIA (Reuters) - Cyprus should brace itself for an extended period of difficulty in the near term after sealing a bailout deal forcing it to forgo much of its banking sector, its former finance minister said.

Michael Sarris, who stepped down as finance minister just five weeks into the job on Tuesday, said in an interview that Cyprus had made mistakes, but said lenders and European Union partners had treated Cyprus unfairly.

"Clearly... mistakes were made, there was excessive growth in bank credit, in government spending. But I don't think it needed to come to this.

"I think this could have been corrected without this really seismic assault on the Cyprus economy," he said.

Sarris's comments came a day after he wrapped up onerous bailout negotiations with the European Union and the International Monetary Fund. He stepped down stating his job was done, and that his position was untenable since a probe into the island's economic demise was likely to include his term too as head of one of a major Cypriot lender before he became minister.

In return for 10 billion euros ($13 billion)in aid, authorities had to wind down the island's second-largest bank, Popular and force heavy losses on wealthier depositors in Bank of Cyprus , the island's biggest bank.

Both banks, which held considerable quantities in Greek government bonds, suffered huge losses on a write-down on Greek debt agreed by the European Union in late 2011. That decision, Sarris said, was "very unwise".

Under terms of the bailout deal the island's budget deficit is expected to reach 2.4 percent of gross domestic product this year, with the primary deficit growing to 4.25 percent in 2014 [ID:nL5N0CP40I].

Those deficit targets in nominal terms and as a percentage of GDP imply that international lenders expect the Cypriot economy to contract almost 8 percent in 2013, shrink by a further 3 percent in 2014 and return to around 1 percent growth in 2015 and 2016.

Bailout talks were overshadowed by accusations the island's banking sector, at about eight times GDP, was opaque and facilitating money laundering.

"They basically really accused us that we were sitting back and printing money, having a lot of foreign firms coming through Cyprus, offering them services and having a good time. I think that was unfair," Sarris said.

Signing the bailout deal was critical, since it removed a "protracted period of uncertainty which was killing the economy".

But, Sarris said, "the prospects for the economy in the next few months are really very very unfavorable".

"I think the restrictive conditions are tending to offset any restoration of confidence that could have propelled consumption and investment spending that are key to recovery. So we are looking at an extended period of difficulty." ($1 = 0.7783 euros)

(Reporting By Michele Kambas; editing by Ron Askew)

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