Cyprus’s economy might contract as much as 13 percent this year under the weight of austerity measures and a restructuring of the country’s banks as agreed in return for a bailout, the government spokesman said.
“In 2013 the recession may not be 8.7 percent as is estimated, it may reach 13 percent,” Christos Stylianides said in comments carried on state-run CyBC on Thursday. The European Commission predicted before the island’s financial rescue that the economy would shrink 3.5 percent this year.
Cyprus’s government wound up talks this week with the so- called troika of officials representing the commission, the International Monetary Fund and the European Central Bank on the terms for the country’s 10 billion-euro ($12.8 billion) bailout. The accord was due to be discussed at a euro working group meeting of finance officials in Brussels Thursday.
The bailout includes public-sector wage cuts in 2014 and some tax increases, according to Stylianides, who said that the government didn’t have much room to maneuver in the deliberations with the troika. Cyprus accounts for barely 0.2 percent of euro-area economy. The banking sector will be reorganized in an orderly manner, Stylianides said.
Cyprus sought aid in June last year, becoming the fifth euro-area nation to request outside help after Greece, Ireland, Portugal and Spain. It fell to the government of Nicos Anastasiades, elected on Feb. 24, to complete talks with the troika.
On March 25, Cyprus reached agreement with euro governments to impose losses on uninsured depositors at the country’s two biggest banks, Bank of Cyprus Plc and Cyprus Popular Bank Pcl (CPB), as part of negotiations for its bailout. Cyprus Popular Bank is to be shut. Cyprus’s banks were closed for nearly two weeks to avoid capital flight, reopening on March 28 with controls limiting financial transactions.
Leaving the 17-nation euro region “would be like jumping into the abyss” and is not an option for Cyprus, said Stylianides.
With implementation of the right measures and investment, Cyprus could see an economic turnaround in 2014, he said. “We can create the conditions to have growth more quickly than the troika expects,” Stylianides said. [Bloomberg]