Cyprus to perform stress test on Greek-exposed banks

The Cypriot central bank said on Friday that banks exposed to Greek debt will be subjected to an independent examination of their books as a prerequisite for a bailout the island is seeking. "At the request of the troika it includes an asset-quality review and a bottom-up stress test to determine the capital needs of each banking institution," the central bank said. It will be coordinated by a steering committee of Cypriot authorities, the European Banking Authority and the troika of lenders negotiating the aid package -- the European Commission, the European Central Bank and the International Monetary Fund. The stress test will be carried out on the island's two largest Greek-exposed banks -- Bank of Cyprus and Popular Bank. Also to be examined are Hellenic Bank, Co-Operative Central Bank and a representative sample of affiliated cooperative credit institutions -- Eurobank and Alpha Bank Cyprus. Troika representatives have visited Cyprus twice since June, when the country called in help after both Bank of Cyprus and Popular said they could not raise funds to meet recapitalisation requirements. A third visit to sign a memorandum has been postponed, as the EU is awaiting the government's counter-proposals for austerity under the terms of an eventual loan deal. The troika reportedly wants to slash the state payroll by 15 percent, shave 10 percent off welfare benefits, reform or scrap the inflation-linked cost-of-living allowance and roll back government-subsidised housing finance. But the island's communist-led government has been resisting austerity moves that it says undermine an economy already in recession and expected to shrink by 1.5 percent this year. It has balked at scrapping 13th salaries and index-linked salaries in the public sector but is prepared to raise VAT by one percentage point to 18 percent and raise the duty on alcohol and cigarettes. Authorities have declined to say how much Cyprus' 17-billion-euro ($22 billion) economy actually needs to remain solvent, but credit ratings agency Standard & Poor's estimates the figure could amount to as much as 15 billion euros over three years.