Cyprus told to proceed with reforms

German Chancellor Angela Merkel has urged Cyprus, which is in the midst of seeking a bailout with international creditors, to proceed with economic reforms so that it can garner support.

Merkel made the comments on Friday during a European conservative parties' conference in Cyprus, hours after the island suffered a credit rating downgrade.

The meeting of the European People's Party (EPP), which made up the largest grouping in the European Parliament, was informal and focused on the EPP's strategy for the 2014 European Parliament elections and the European Union's multi-annual financial framework for the period 2014-2020.

Delegates also discussed the EPP's candidate to seek the office of the president of the next European Commission.

"On the one hand we need reforms and on the other hand we can then talk about solidarity," Merkel said on arriving for the meeting hosted by the head of Greece's centre-right Democratic Rally Nikos Anastasiades.

"First of all, I am here to support the presidential candidacy of Nikos Anastasiadis and of course we are here to discuss the financial situation."

Hours earlier, the international ratings agency Moody's downgraded Cyprus' credit rating by three notches from B3 to Caa3.

The heavily indebted Mediterranean island is seeking a bailout of some 18 billion euros ($A22.75 billion) from the European Stability Mechanism bailout fund.

Merkel on Wednesday said the tiny euro member state would not be given preferential treatment in the bid to shore up its economy.

Politicians in Berlin say they worry about using German taxpayers' money to bail out Cyprus, a reputed tax haven and money laundering hub for Russian millionaires.

International lenders are expected to deliver a report on the ailing Cypriot banking sector on January 21, which would form the basis for a bailout decision.

Speaking to the press following bilateral discussions with Merkel, Anastadiades said the bailout would most likely be finalised when the new government is sworn in following elections.

Anastasiadis, a front-runner in Cypriot presidential elections on February 17, has repeatedly said he is committed to meeting the terms of the bailout.

He said that "Cyprus has Germany's support as long as we implement everything we have agreed with international creditors."

Cyprus has already proceeded with public sector pay cuts and tax increases as part of the draft bailout deal but it is resisting calls for privatisations.

Greek Prime Minister Antonis Samaras, also on the island for the meeting of centre-right European parties, said Cyprus would, along with Greece, "manage to pull through."

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