Brussels, 11/04/2013 (Agence Europe) - Cyprus is in for troubled years ahead, according to a document prepared by the European Commission and the European Central Bank (ECB) put online on Wednesday by the Financial Times. The economy is expected to be in troubled waters until 2015 but then start making a little progress. Cypriot GDP is expected to shrink by 8.7% in 2013, and then by 3.9% in 2014, before returning to growth in 2015 (1.1%). These forecasts are far worse than those published by the European Commission in February before the bailout was agreed upon. In February, the economy was expected to shrink by 3.5% this year and 1.3% in 2014. The economy is largely based on banking, which is bloated in comparison with the size of the economy, and the financial industry will itself be shrunk as part of the agreement reached with the eurozone in return for a loan of €10 billion.
The Cypriot state will now have to contribute twice as much to the bailout as initially forecast. After a first agreement that included the highly controversial raid on savings, the eurozone recommended that Cyprus find €5.8 billion itself as part of its bailout package. The eurozone justified this by saying the country's debt had to be kept down. The documents leaked by the FT talk about Cypriot having to find €13 billion, most of it (€10.6 billion) from dissolving the country's second-biggest bank, Laiki, and raiding savings and investments to recapitalise Bank of Cyprus (BoC).
Cypriot's financing needs have therefore risen from €17.5 billion to €23 billion.
Of the €10 billion from the eurozone, €6.5 billion will be used to service the debt and the country's budget. The country is expected to need €3.4 billion for its budget for the period up to 2016. In order to find the €2.4 billion needed to secure aid from the eurozone and the billion euro from the IMF, Cyprus will be arranging privatisation to net some €1.4 billion. The documents say that it may also sell off some of its gold reserves to the tune of €400 million. A spokesperson from the Central Bank of Cyprus is reported to have said on CNBC that nothing of the sort was being discussed. New taxes (like the increase in company tax from 10% to 12.5%) is expected to net €600 million over three years. The documents suggest that it might be possible to roll over a billion euro of marketable debt owned by Cypriot investors that “arrive at maturity over the programme horizon, thus reducing external financial assistance for debt redemption by the same amount”. The idea is that the combination of measures will reduce the country's debt to 104% of GDP by 2020. In Dublin, finance ministers are expected to endorse the documents before they are presented to national parliaments for approval. (EL/transl.fl)