Cyprus, the fifth country in the euro area to seek external aid, wants to avert austerity measures that would hinder growth as it negotiates a bailout with international lenders, said Neoklis Sylikiotis, the government minister for commerce, industry and tourism.

The euro-area economy contracted 0.2 percent in the second quarter as tougher austerity measures pushed at least six countries in the single-currency bloc, including Italy and Spain, into recession. Cypriot gross domestic product has fallen for four straight quarters.

The Communist-led government of Cyprus is “opposed to indiscriminate, across-the-board measures that lead to recession instead of growth,” Sylikiotis said in an interview. If steps are taken that deepen the recession, Cyprus might have to appeal for a second rescue in a couple of years, he said.

Cyprus sought a bailout on June 25. Eurozone finance ministers agreed to begin talks two days later. No amount was specified for the rescue, which will encompass the public sector as well as banks. Cyprus also sought assistance from the International Monetary Fund and Russia. Central Bank of Cyprus Governor Panicos Demetriades said he wants a deal to be struck by the end of September.

Officials from the so-called troika overseeing the rescue — the European Commission, European Central Bank and IMF — told Cypriot lawmakers on July 27 that the country’s public finances “are in worse shape than we expected,” signaling that the bailout may exceed the 10 billion euros staffers had first estimated. The new estimate is in the range of 12 billion to 16 billion euros, a European official said on condition of anonymity.

Demetriades told lawmakers that banks alone may need more than 12 billion euros — 67 percent of GDP — of fresh capital after losing more than 4 billion euros in Greece’s debt restructuring earlier this year. On June 25, Fitch Ratings estimated lenders’ capital needs at half that amount.

“The problem in Cyprus stems from banks that are operating in Greece,” said Sylikiotis, who is on the government’s team negotiating with the troika. Bailout funds “shouldn’t be counted as public debt, as has happened elsewhere,” he said.

Sylikiotis declined to say how much aid Cyprus will need because an audit of the banks’ portfolios by the central bank hasn’t been completed. Rescue funds will be used to recapitalize lenders and help finance deficits this year and next, he said.

Fiscal gap

The government intends to trim the deficit to below 2.5 percent of GDP this year, exceeding European Commission requirements, Finance Minister Vassos Shiarly said on April 30. The deficit widened to 6.3 percent of GDP last year from 5.3 percent the year before.

The government’s fiscal gap on a cash basis for the period January to June narrowed to about 3 percent of GDP from 3.6 percent the year before, the Finance Ministry said on Tuesday.

“There are trends in the economy, in tourism and energy, that will restore growth in the next few years,” Sylikiotis said.

Last year’s increase in tourist arrivals will continue into next year, he said.

Tourism accounted for 18 percent of Cypriot GDP and almost one in five jobs in 2011, according to the London-based World Travel and Tourism Council.

Source: Bloomberg