Cyprus confirmed on Thursday that the cost of its EU-IMF bailout has surged to 23 billion euros (US$30 billion) from 17.5 billion euros, putting the already teetering economy in danger of collapse and further endangering large bank depositors.
“It’s a fact the memorandum of November talked about 17.5 billion euros in financing needs. And it has emerged this figure has become 23 billion,” said government spokesman Christos Stylianides.
That means Cyprus will now have to find 6.0 billion euros more than the 7.0 billion euros mooted in a preliminary agreement reached on March 25 in order to secure an EU-IMF contribution of 10 billion euros.
Under the preliminary terms of a bailout agreed last month, Cyprus will drastically reduce the size of its bloated banking sector, raise taxes, downsize the public sector workforce and privatise some state-owned firms.
Stylianides was commenting on a new assessment of Cyprus’s financing needs that eurozone finance ministers, including that of Cyprus, are to discuss in Dublin from Friday in a bid to reach a final deal.
A source close to the talks said “the financing needs of Cyprus have evolved. Notably, while the restructuring of the financial sector will now be very largely financed through private means, the projected fiscal needs of the state have increased as a result of the deeper-than-expected recession.”
A copy of the assessment obtained by AFP says the European Commission and European Central Bank now estimate that “Cyprus’s gross financing needs amount to about (23 billion euros) over the three-year programme horizon” through the first quarter of 2016.
“This includes needs for the recapitalisation of the banking sector, the redemption of maturing medium- and long-term debt, including loans and fiscal needs.”
Under the March deal, failed lender Laiki Bank is being wound up and its healthy assets transferred to the Bank of Cyprus.
To cover part of Cyprus’s revenue-raising needs, there was talk that customers with deposits of more than 100,000 euros at Bank of Cyprus could lose up to 60 per cent of those holdings. That figure could now be even higher.
Those in Laiki will have to wait years to see any of their money over 100,000 euros.
A further 600 million euros would be raised through a corporate tax rise, 400 million euros through the sale of excess gold reserves, and further funding from privatisation and a roll-over of debt held by Cypriot investors.
Jonathan Loynes, chief European economist at Capital Economics in London, noted on Thursday that the “biggest burden of the increase in the bail-out will fall on depositors and bank bond-holders, whose combined contribution will rise from an expected 5.8 billion euros to 10.6 billion euros.”
Cyprus is already in recession, with unemployment at around 15 per cent and expected to grow sharply this year and next.
The euro zone Cyprus assessment is forecasting GDP to plunge by 8.7 per cent this year, led by a whopping 13.9 per cent drop in domestic demand, and to fall another 3.9 per cent next year.
Loynes warned that “the sheer size of the increase has underlined the extent of the enormous challenges facing Cyprus itself.”
He said the forecast for Cyprus returning to real GDP growth of 1.9 per cent in 2016 and the budget to balance “incorporate a considerable degree of optimism” given uncertainties over the future health of the banking sector and the impact of the planned fiscal tightening.
“This could force Cyprus to undertake further fiscal tightening to meet its borrowing targets and casting doubt over the sustainability of the bail-out.”