Nicosia says recession may reach 13 percent

The economy of Cyprus may shrink by as much as 13 percent this year, government spokesman Christos Stylianides warned on Thursday, while an independent report on the causes of the crisis in the Cypriot credit sector sent jitters throughout the island’s financial establishment.

Speaking on state broadcaster CyBC, Stylianides said that the country’s gross domestic product may shrink far more than anticipated under the weight of the austerity measures and the restructuring of the republic’s banks.

“In 2013 the economic contraction may not come out at 8.7 percent [of GDP] as calculated, but reach up to 13 percent,” Stylianides said, although he added that if the correct measures are introduced and investments are implemented, Cyprus could experience a recovery from as early as next year. “We can create the conditions to grow earlier,” he told CyBC radio. He further added that an exit from the eurozone “would amount to a dive into the abyss” and is not an option for Cyprus.

Before the Cypriot crisis became evident, the European Commission had forecast a 3.5 percent drop in the country’s GDP.

US firm Alvarez & Marsal was commissioned by the Central Bank of Cyprus to investigate why Bank of Cyprus, the island’s biggest commercial lender, had bought so many Greek state bonds in 2009 and 2010. It found that records that could be deemed incriminatory must have been erased from the computers of former chief executive Andreas Eliades and treasury department director Christakis Patsalides.

Meanwhile the details of the agreement between Nicosia and its prospective creditors point to additional austerity measures of 351 million euros that the Cypriot government will have to impose this year. Another clause provides for the shrinking of cooperative banks on top of the resolution of the main banking system.

Nicosia will also have to stop supplying first-residence grants and construction loans and reduce pensions by between 0.8 and 2 percent as well as the number of pensioners receiving Easter bonuses. Corporate income tax, property tax and tax on interest are all to go up.

The first installment of the 10-billion-euro bailout from the eurozone and the International Monetary Fund is expected in May.

European Central Bank President Mario Draghi blasted Cyprus’s initial decision to charge a levy on insured as well as uninsured banks depositors, saying it was a mistake. “That was not smart, to say the least, and was quickly corrected,” he commented on Thursday.

Subscribe to our Newsletters

Enter your information below to receive our weekly newsletters with the latest insights, opinion pieces and current events straight to your inbox.

By signing up you are agreeing to our Terms of Service and Privacy Policy.