By Michele Kambas
NICOSIA (Reuters) - Cyprus's new President Nicos Anastasiades vowed on Thursday to work for a swift conclusion of a bailout for the cash-starved island, ruling out debt or deposit "haircuts" for the Mediterranean nation threatened with a financial meltdown.
Economic turmoil engulfing Cyprus, one of the euro zone's smallest economies, could test the European Union's mettle in a crisis threatening to spill beyond the tiny island's shores and unravel nascent recovery in the bloc.
Cyprus has been waiting for an economic bailout from the EU and the International Monetary Fund for the past eight months, hobbled by its banks' exposure to debt-crippled Greece and fiscal slippage.
The disbursement of aid has been held up by concerns the island could barely afford a bailout bill which might equal its domestic output, and worries in some countries, particularly Germany, that Cyprus lags in financial transparency.
"We are seeking the solidarity of our (EU) partners, and within that framework we will negotiate for the conclusion of a loan agreement the soonest possible," Anastasiades said in his investiture speech to Cyprus's parliament.
Aid to Cyprus is expected to take center stage when eurozone finance ministers meet in Brussels on March 4. A deal is anticipated at the end of March, a senior euro zone official said.
In one of his first appointments, Cyprus will be represented by new finance minister Michael Sarris, an economist with good contacts in Europe, as well as in the U.S., where he was a senior manager for the World Bank for three decades.
Conservative Anastasiades, 66, swept to victory in a presidential runoff on February 24, armed with a strong mandate to conclude desperately needed aid from the EU and the IMF.
Cyprus sought aid last June, after an EU-sanctioned decision to write down Greek sovereign debt blew a 4.5 billion euro - or 25 percent of GDP - hole in balance sheets of the island's two largest lenders which then turned to the state for support.
The island has itself been shut out of international financial markets for almost two years because of the implied high interest on its traded debt - even though that has tumbled in recent weeks to an 18 month low of 9.20 percent on a 10 year benchmark bond on Thursday.
Amid the worst recession in 40 years, the bank aid figure has since snowballed, and the island could need up to 17 billion euros in aid for both its banks and for fiscal needs, almost equalling the size of its economy.
"We are not seeking special treatment, but we are asking we be treated fairly," Anastasiades told lawmakers.
Cyprus has an executive system of government. Investiture takes place in parliament, in the same chamber where Britain formally handed over sovereignty to the former British colony in 1960. Anastasiades's term is for five years.
Talks with lenders have been overshadowed by concerns the bailout could be too big to ever pay off, giving rise to speculation of how to make it manageable, including debt or even deposit haircuts, or paying back less to investors.
"I want to be absolutely clear. Absolutely no reference to a haircut on public debt or deposits will be tolerated. Such an issue isn't even up for discussion," Anastasiades said.
But doubts persist. ECB lawmaker Benoit Coeure told Reuters on Wednesday that depositors in Cypriot banks should not be forced to take losses across the board as part of a euro zone rescue, but did not rule out making the biggest depositors share some of the burden.
Investor service Moody's said on Thursday that while the election of Anastasiades boosted chances of a financial deal, it did not alter its own probability of the island defaulting.
The recapitalisation needs of the island's domestic banks remained uncertain, and Cyprus's debt burden could rise dramatically to unsustainable levels, Moody's said.
"There is a 50 percent chance that the sheer size of Cyprus's anticipated debt load will eventually compel authorities to pursue every avenue for debt reduction, including private-sector losses on Cypriot debt," Moody's said in a statement.
(Editing by Michael Roddy)