14th Aug 2018

Cyprus risks remain, Troika warns

  • Cyprus became the first eurozone country to impose capital controls (Photo: jnocca93)

Cyprus has made a "determined start" to its rescue programme, according to a report published on Wednesday (18 September) by the country's creditors.

"[But] consumer confidence remains at historically low levels, while labour market conditions are gradually worsening and weighing on private consumption," the report said.

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The findings are part of the first review of the €10 billion programme agreed in April and carried out by the Troika, composed of officials from the European Commission, European Central Bank and the International Monetary Fund (IMF).

The main forecasts for the Cypriot economy remained unchanged, with the EU executive projecting an 8.7 percent contraction in 2013 followed by a further 3.9 percent fall in output in 2014. The country is then expected to return to growth in 2015.

But the forecast for the Cypriot labour market is now bleaker.

The Troika expects unemployment to be higher than forecast in April, with the jobless total set to rise to 17.5 percent by the end of 2013 and hitting 19 percent in 2014.

Meanwhile, Cyprus' debt burden is expected to jump to 115 percent of GDP by the end of 2013, a near 30 percent leap from 2012, and is expected to peak at 127 percent of GDP in 2015, leaving it second only to Greece in the eurozone.

Officials were also tight-lipped on when restrictions on taking money in and out of Cyprus would be lifted.

Cyprus became the first eurozone country to impose capital controls in March as Nikos Anastiades' centre-right government made a desperate attempt to prevent panicked savers from shifting their money out of the island's banks.

The government set restrictions on bank money transfers and withdrawals, with a daily cash withdrawal limit of €300, most of which are still in place.

"We have avoided naming specific dates," a commission official told reporters on Wednesday, adding that "there are milestones and once they are met we can start to relax the controls."

He added that the Cypriot government would have to consult the Troika before making any changes to the controls.

Although the EU executive is quietly optimistic about Cyprus' prospects, it has struck a cautious tone in recent weeks, perhaps mindful of the criticism it faced after its forecasts for the Greek bailout programme proved to be over-optimistic.

"We are fully aware that this is not a walk in the park," the official commented, adding that "the situation in Cyprus is extremely difficult … a very tough economic situation".

For its part, the IMF released its own review of the Cypriot bailout on Monday (16 September), announcing that it would release an €84.7 million tranche.

Under the terms of the agreement, the IMF will loan Cyprus up to €1 billion.

Cyprus had made "commendable progress in implementing near-term stabilisation policies," said Christine Lagarde, the fund's managing director.

Nicosia has already received the first tranche of aid worth €3.1billion, which the Troika believes will be sufficient to cover its debt and deficit financing costs until the end of 2013, when a further €1.5 billion will be released.

The next Troika review mission will be in October.

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