Cyprus' EU bailout deal to have immediate, lasting impact

Second biggest lender to be wound up overnight, unemployment forecast to hit 26pc within a year

PUBLISHED : Tuesday, 26 March, 2013, 12:00am
UPDATED : Tuesday, 26 March, 2013, 5:08am

Cypriots face years of economic hardship due to a harsh euro-zone bailout deal, analysts said yesterday, while the Mediterranean island's future in the currency remains deeply uncertain.

The fallout will begin immediately, with food and medicine shortages likely in coming weeks as businesses struggle amid 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 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 Cypriot citizens 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 said.

Under the terms of the deal, Cyprus' second biggest lender Laiki (Popular Bank) will be wound up overnight, and investors looked set to lose all unsecured deposits of more than €100,000 (HK$1.01 billion).

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, Mullen warned.

"Let's say minus 15 percent for the first year and minus 5 percent the next year," she said when asked about the likely impact on growth.

"Unemployment was already 15 per cent. With Laiki, it will instantly be 17.5 per cent. It will be 20 per cent within three months and 26 per cent within a year," she added.

Former Cypriot central bank governor Afxentis Afxentiou said the effects of the bailout could last up to a decade. "Cyprus has suffered a big hit, and our standard of living will spiral downward, although the economy may be 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 Cypriot government spokesman insisted yesterday the deal had prevented a "disorderly" euro-zone 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," Mullen said.

Rebuilding the 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.