Tuesday

22nd Jan 2019

Cyprus economy to shrink 12.5% despite EU bailout

Cyprus' economy will shrink by 12.5 percent over the next two years and its government needs to sell part of its gold reserves in order to meet the conditions of an EU-IMF bailout, whose final details are to be agreed over the weekend.

According to internal papers prepared by the troika of international lenders and seen by Reuters and the Financial Times, Cyprus' total financing needs are now €23 billion, six billion more than was originally estimated last year.

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The €10 billion loans from the eurozone and the International Monetary Fund (IMF) will not increase, however.

Only Cyprus' own contribution will do so.

The extra money is to come from wiping out deposits in Laiki Bank, revamping the pensions system, increasing taxes and selling €400 million worth of "excess gold reserves," the troika says.

Gold prices fell around one percent on Wednesday when the troika report was leaked. But a spokesman for the Cypriot central bank said that no gold sale had been "raised, discussed or debated" with the bank's board.

Cyprus' total gold reserves amounted to 13.9 tonnes at the end of February, according to the World Gold Council.

EU finance ministers meeting in Dublin on Friday and Saturday are to iron out the final details of the bailout, while national parliaments in Finland, Germany and the Netherlands are expected to vote on the programme in the coming weeks.

A spokesman for the German finance ministry on Wednesday (10 April) said the Bundestag will have a first look at the Cyprus bailout next week.

The German opposition has been just as tough on Cyprus' money laundering and tax haven policies as the coalition government and even threatened to derail the deal if it is not given enough reassurances that Cyprus' "business model" will be overhauled.

Even with its €10 billion bailout, the troika projects a steep fall in domestic consumption and a "non-negligible risk" of a series of households and companies going bankrupt.

This will in turn further aggravate unemployment, consumer confidence and the overall business environment, it says.

"Also, the deep restructuring of the Cypriot banking sector could have strong spill-overs on related professional business services and financial services exports," the document notes.

If revenues from tax increases and bank restructuring turn out to be less than expected, Nicosia cannot hope for more money from its eurozone peers, says the document.

Instead, the Cypriot government "has committed to stand ready to take additional measures," including more spending cuts.

Revenues from recently discovered offshore gas reserves may positively impact the bailout programme, but given that their exploitation remains uncertain due to a territorial conflict with Turkey, the troika did not include them in its projection.

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