Cyprus Meets Aid Terms Even as Risks Substantial: Troika

Cyprus is complying with the terms of its bailout program even as risks remain substantial and the short-term economic outlook continues to be difficult, the country’s international creditors said.

The key short-term risks to a 10 billion-euro ($13.2 billion) bailout from the euro area and the International Monetary Fund relate to macroeconomic uncertainty and the magnitude of the country’s recession, Delia Velculescu, the IMF’s mission chief for Cyprus, told reporters in a conference call today, following the completion of the first review of the country’s adherence to its adjustment program.

The “overall assessment is that Cyprus’s program is on track,” the so-called troika of the European Central Bank, European Commission and International Monetary Fund said earlier in a statement posted on the ECB’s website. “All the fiscal targets have been met as a result of significant fiscal consolidation measures underway and prudent budget execution. The authorities have taken decisive steps to stabilize the financial sector and have already been relaxing deposit restrictions and capital controls.”

Cyprus secured the bailout in March in return for measures including a tax on bank deposits of more than 100,000 euros. Those concessions were demanded by creditors in a bid to shrink the country’s banking sector and have led to the Mediterranean island needing to impose capital controls as it wound down its second-biggest lender.

Deposit Levy

Bank of Cyprus exited resolution after the central bank finalized the terms of a deposit levy at 47.5 percent yesterday. That is 10 percentage points more than what was originally taken from uninsured deposits at Cyprus’s biggest lender in April as part of Cyprus’s loan deal.

Recent indicators support the program’s forecasts for a cumulative contraction in economic growth of around 13 percent in 2013 and 2014, according to the troika. The economy is expected to recover modestly from 2015, driven by non-financial services, it said.

Other risks to the implementation of the program include the application of capital controls and refocusing Cyprus’s business model on factors other than financial services, Velculescu said.

While the first troika review was “positive,” major challenges still lie ahead for Cyprus, Cypriot Finance Minister Haris Georgiades told reporters in Nicosia today. The government will intensify reforms, include “serious” fiscal measures in the next state budget and is determined to ensure fiscal viability, he said.

Euro-area finance ministers and the IMF are expected to discuss Cyprus’s first review in September and approval would see the disbursement of 1.5 billion euros by the European Stability Mechanism and around 86 million euros by the IMF, according to the statement.

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