CONTAGION:CYPRUS REQUIRES no bailout for the moment, the republic's new finance minister, Kikis Kazamias, said yesterday as the EU urged the reshuffled government to enact key economic reforms.

Mr Kazamias said that steps should be taken to avoid a bailout in coming months.

The central bank and the Bank of Cyprus, the country’s largest, have warned that Cyprus could become the fourth euro zone member to seek an injection of funds if the government fails to reduce the deficit.

Mr Kazamias, an economist and member of the ruling communist Akel party, is seen as a figure capable of negotiating with the powerful trade unions.

The civil servants’ union, in particular, has come under fire for refusing to lower, even on a short-term basis, salaries and pensions, a major item in the budget.

“We have every reason to be optimistic from the moment everyone assumes their share of responsibility,” Mr Kazamias said.

He was backed by EU economic and monetary commissioner Olli Rhen who said: “Cyprus has overall sound fundamentals.”

Mr Kazamias and nine other ministers were sworn in by President Demetris Christofias, who is facing the most serious crisis of his term in office. This was precipitated by the July 11th explosion of munitions that devastated the power station that supplied more than half of all Cyprus’s electricity. It hit the troubled economy hard at a time Cypriot banks have had to deal with exposure to Greece.

Last week, Moody’s and Standard Poor’s international investment agencies downgraded Cyprus credit rating, raising alarm over the viability of the economy, the second smallest in the EU.

The previous government was dissolved on July 28th when Akel’s partner, the right-centre Democratic Party (Diko), pulled out its ministers due to Mr Christofias’ refusal to meet its demands.

Negotiations to resume co-operation broke down on Thursday when the sides were unable agree. Diko’s abandonment has isolated Mr Christofias and his credibility and popularity have plunged due to the explosion. Political parties and a third of the populace have called for his resignation. This has weakened his position in ongoing talks with the Turkish Cypriots aimed at reunifying the island.

The alienation of Diko and opposition from the Akel’s chief rival, the Democratic Rally are also likely to make it all the more difficult for the austerity package to be adopted and implemented.