Cyprus faces years of economic hardship following EU-IMF bailout deal, say analysts

Cypriots face years of economic hardship due to a harsh eurozone bailout deal, while the Mediterranean island’s future in the single currency remains deeply uncertain, analysts said Monday.

The fallout will begin immediately with food and medicine shortages likely in coming weeks as businesses struggle with a lack of cash in Cypriot banks, which were hammered by the agreement, said economic experts.

The tiny nation then faces two years of deep recession coupled with soaring unemployment, with few hopes of longer-term recovery as Russians and other foreign investors will steer clear of its devastated financial sector.

Fiona Mullen, an economist specialising in Cyprus, said that while the deal had prevented an overnight exit from the euro many Cypriots would wonder if it would be better off leaving anyway.

“They feel very betrayed by an awful lot of countries in this and I think that there are going to be longer term implications,» Mullen told AFP.

Under the terms of the deal Cyprus’s second biggest lender Laiki (Popular Bank) will be wound up overnight but investors looked set to lose all unsecured deposits of over 100,000 euros.

The Bank of Cyprus, the island’s No.1 lender, survives but the government said a «haircut» of around 30 percent on all deposits of more than 100,000 euros was likely.

Mullen, a partner at Strata Insight energy policy risk consultancy, said capital controls including drastic limits on withdrawals from bank ATMs were likely for several weeks.

“That means it’s difficult for businesses to pay salaries and buy goods and things like that,» Mullen said, adding that the impact of this had «not been thought through.”

“The companies that are big are the food importers and food sellers and medicine importers who might have a very short term crunch on things like food, and Cypriots are already starting to stock food in the past few days,» she said.

The longer term was even more bleak, with the economy likely to suffer its biggest blow since the 1974 invasion of northern Cyprus by Turkey, she warned.

“Let’s say minus 15 percent for for the first year and minus 5 percent the next year,» Mullen said when asked about the likely impact on growth.

“Employment was already 15 percent. With Laiki it will instantly be 17.5 percent. It will be 20 percent within three months and 26 percent within a year.”

Former Cyprus central bank governor Afxentis Afxentiou said the effects could last up to a decade.

“Cyprus has suffered a big hit and our standard of living will spiral downward, although the economy maybe able to recover in two to three years our standard of living will take at least 10 years to return,» he told state radio.

A Cyprus government spokesman insisted on Monday the deal had prevented a «disorderly» eurozone exit but Mullen said that was still a possibility later.

Cyprus ditched the pound for the euro in 2008.

“I do wonder whether Cypriots are starting to wonder whether it is worth Cyprus staying in the euro. But the problem is there is no legal framework for it,» she said.

Rebuilding the Cyprus economy will meanwhile be difficult when its bloated financial services sector is worst hit, and its many Russian investors in particular will have suffered from the levy on deposits to fund the bailout.

“It’s very difficult to be bullish about the Cyprus economy,» Neil MacKinnon, an economist with VTB Capital in London, told AFP.

“Downsizing the financial system was the explicit objective of the EU and IMF,» he said, adding it meant «job losses and restrictions on the banking system» with a «negative impact on the economy which is going to be quite severe.”

MacKinnon also raised doubts about Cyprus’s position in the euro despite the deal.

“It may be that the social and political reaction in Cyprus is such that the hostility towards the EU builds and you could not rule out a future exit,» he said.

The wider implications for the EU economy and further afield were also grim, added MacKinnon.

The size of the bailout was «small potatoes» but the unwillingness of the EU the International Monetary Fund and European Central Bank augured badly for future crises.

“The economic perspective looks poor generally, not just for Cyprus,» he said.

[AFP]