The Mediterranean island nation of Cyprus said on Wednesday it expected talks to start next week with lenders on badly needed aid, as ratings agency Standard & Poor's pushed it deeper into junk territory, implying domestic political expediency lay behind a delay in clinching a deal.

One of the smallest nations in the eurozone, Cyprus sought European Union (EU) and International Monetary Fund (IMF) aid in June after its two largest banks suffered huge losses due to a write-down of Greek debt.

A conclusion with lenders on aid has been plagued by delays as the island's government attempted to get the public onside with an austerity package pending since July.

"I am sure we will have a positive conclusion to our request for aid," Cypriot Finance Minister Vassos Shiarly told reporters.

Standard & Poor's, which downgraded Cyprus three notches to "B" from "BB" with a negative outlook, said electoral considerations - a presidential election is due in February 2013 - contributed to "policy inertia".

Meanwhile, it said, the state - shut out of international capital markets since mid 2011 - was relying heavily on distressed banks it was obliged to recapitalize, in the absence of direct European Stability Mechanism support for Cypriot banks.

DEAL SOUGHT BY MID-NOVEMBER

Cypriot officials say the government is keen for a bailout deal by mid-November. Without that, there is speculation that the island of one million inhabitants could face a cash crunch as early as December.

Asked by Reuters whether he expected discussions with lenders to start before the end of the month, Shiarly said:

"Within the month, and certainly in the coming week. Time is restricted and there is not much time left."

But with elections looming in four months and unwilling to take the flak for any fallout from unpopular austerity measures, the leftist government has apparently been biding its time on taking a stand on lenders' austerity proposals pending since July 25.

"If the problems were dealt with in a more timely manner our economy would be in a much better state, and we wouldn't be confronted with the dilemma of either going broke, or accepting onerous terms," said Photis Photiou, a senior official of the opposition centrist Democratic Party.

 

BAILOUT AMOUNT UNCLEAR

It is unclear how much aid Cyprus may require. The island has been unable to fund itself since it was shut out of capital markets 18 months ago.

Shiarly said a figure had not been set for Cyprus's financial needs because of a difference of opinion between the government and lenders on the recapitalisation needs of banks.

There is widespread speculation Cyprus's bailout will exceed 10 billion euros ($13 billion), or 60 percent of its GDP. Cyprus's fiscal requirements until 2015 amount to about 5 billion euros.

Standard & Poor's said the island's real economy was being increasingly strained by worsening domestic credit conditions, and domestic loan books of banks were deteriorating faster than initially anticipated.

It said it expected a support package upwards of 15 billion euros to 2015, "but we note the considerable uncertainties surrounding the estimates of the banking sector's potential capital needs," Standard & Poor's said.

The talks involve the European Commission, IMF and the European Central Bank, known as the troika.

In measures expected to generate 975 million euros in savings, they have asked for cutbacks to an inflated public sector payroll, pension reform and creation of a 'bad bank' to assume problem exposures of the financial sector, mainly in Greece.