Cyprus?s eurozone economy will shrink by 1.1 percent in 2012, the central bank forecast on Tuesday, a more pessimistic outlook than the zero growth seen in December.
After suffering a year-long recession, Cyprus can only expect ?anaemic growth? of 0.4 percent next year, the bank added.
The outlook is much bleaker than the government?s own estimate of a 0.5 percent contraction this year followed by 0.5 percent growth in 2013.
The bank said consumer and business confidence was at a ?very low? ebb, while the unfolding political and economic crisis in Greece signals ?serious consequences? for the banking system, compounding an ?already negative climate for 2012.? The latest forecast comes just two days after the government conceded on Tuesday that there is a serious possibility Cyprus may need an EU bailout to save its banking system, which is heavily exposed to Greek debt.
?The possibility of addressing the financial stability mechanism to support the banking system, due to the problems created by excessive exposure of banks to Greece, is a serious possibility,? deputy government spokesman Christos Christofides told reporters.
He said the government was looking at various ways to support the banks, which included finding a loan ?from elsewhere.? Cyprus has already secured a 2.5 billion euro ($3.2 billion) low-interest loan from Russia to cover its refinancing needs for this year.
The recession-hit economy is struggling with record unemployment, austerity measures and trying to rein in a deficit twice the EU accepted limit of three percent of GDP.
The government is committed to getting its bloated deficit to below 3 percent this year from 6.4 percent in 2011.
But it is reluctant to introduce deeper public cuts to drastically slash the deficit.
?Cyprus will not go to the support mechanism because it has a fiscal deficit of 2.5 or three percent — if we finally apply. This must be crystal clear, it will be to support the banking system,? said Christofides.
The government has already underwritten a 1.8 billion euro capital issue for the island?s second largest bank, Popular, which is the most heavily exposed to Greek debt.
On Monday, the European Commission said it remains ?confident? Cyprus can avoid resorting to a eurozone bailout if it keeps reforms on track.
But central bank Governor Panicos Demetriades told the Financial Times in an interview published on Sunday that Cyprus was nearing an EU bailout request to deal with the impact of the Greek crisis on its own banking system.
Demetriades acknowledged that with an end-June deadline to find the money to recapitalise Popular Bank, the country was at ?an important crunch time.? Neither the government nor its commercial banks have been able to borrow from international money markets since last June due to the island?s debt being reduced to junk status by two of three international credit agencies. [AFP]