Brussels, 16/05/2013 (Agence Europe) - On Wednesday 15 May, the International Monetary Fund made the first payment, €86 million of its €1 billion share of Cyprus' aid programme.
Despite what she called “bold” moves to help Cyprus' banks and “ambitious” budget consolidation measures, the director general of the IMF, Christine Lagarde, said there were “significant challenges” on all fronts. She said Cyprus has to restore credibility in its banking sector and reduce debt and budget deficits to a sustainable level, adding that there was no room for slippages in implementation of the programme. She said it was important to boost supervision and checks on banks and cooperatives and tighten up measures for preventing money-laundering.
Commenting on Cyprus' budget, Lagarde says that further measures, to the tune of 5% of GDP, will be needed next year in order to keep public debt under control.
The IMF expects Cyprus' economy to shrink by 9% in 2013 and 4% in 2014, before recovering slightly in 2015. Growth will remain modest for several years as the country adjusts its business model, stabilising at just below 2% by 2020, says the IMF. Lagarde says the restrictions on capital movements should be relaxed at a speed that preserves financial stability and minimises distortions of business activity.
IMF favours direct bailout of banks. In a working document leaked on the web, two members of the IMF say that the first aid programme, which included an across-the-board raid on bank deposits, was unacceptable as it forced losses on small, guaranteed, savings and did not distinguish between solvent and insolvent banks: “In contrast, this program preserves insured depositors and does not impose losses on depositors of solvent banks. Also, by “bailing-in” uninsured depositors, it reduces the burden on tax-payers. However, direct recapitalisation of insolvent banks by the European Stability Mechanism (ESM) would have been a far better option, with much higher chances of success. It would have not deprived Cypriot businesses from their working capital and medium-income households from their life-savings. Alas, this option was, as staff puts it, “not available” (i.e. not acceptable for Cyprus' euro-area partners).” (EL/transl.fl)