Brussels, 03/09/2013 (Agence Europe) - The raiding of uninsured bank accounts (those with more than €100,000) in the two biggest Cypriot banks, Bank of Cyprus (BoC) and Laiki, has brought small business on the island to its knees.
As part of the restructuring of the country's banks, all uninsured bank deposits in the now disbanded Laiki and 46.5% of uninsured BoC deposits have been converted into bank shares.
A draft report by the European Commission and the European Central Bank after the first assessment by the troika (European Commission, ECB and International Monetary Fund) in Nicosia - which this newsletter has seen - talks about a significant share of uninsured deposits being the working capital of small businesses, which have suffered greatly from the raids. These small companies have lost nearly €1 billion in total, 6% of Cyprus' annual GDP. The restrictions on movement of capital have been eased, but remain in place, and have no doubt prevented a further exodus of capital in a situation where lending was already hard to come by.
The Commission and ECB regret the delays in restructuring the country's banks. In July 2013, the eurozone said that the BoC had to be made viable and the troika now warns that a total restoration of the freedom of movement of capital will not be authorised until the resolution and recapitalisation of BoC has been completed and the rescue strategy for cooperative banks has been approved. The Cypriot president, Nicos Anastasiades, has warned on several occasions that the capital restrictions are causing cash-flow problems for the banks and this is having a knock-on effect on the rest of the economy (see EUROPE 10865 and 10867).
Employment in Cyprus has slumped. In April, the troika forecast that unemployment would reach 15.5% in 2013 and 16.9% in 2014, but is now less optimistic, forecasting unemployment of 17% in 2013 and 19.5% in 2014.
The troika has now, however, altered its growth forecasts, expecting GDP to shrink by 8.7% in 2013 and 3.9% in 2014. The Cypriot government expects revenue from the newly discovered gas deposits will get the country back on its feet, but the Commission calls for caution, noting that the government's strategy has to take into account in a more explicit and over-arching manner the uncertainty about the actual scale of gas available and how long it will take to bring it to market. The report recommends an action plan be set up for tourism, which it says now looks like a clear engine for future growth and jobs.
The aid plan is on track, despite delays. The Commission and the ECB say that the Cypriot aid plan is on track and praise work on the country's budget in the first half of this year. State income has been higher - and expenditure lower - than expected. This broadly positive assessment paves the way for payment of a loan of €1.5 billion to recapitalise cooperative banks, assuming that the Eurogroup meeting in Vilnius on Friday 13 September gives the go-ahead. Before that can happen, the Commission has to clear the cooperative bank restructuring plan under EU state aid rules. (EL/transl.fl)