Cyprus Economy Might Shrink 13% in 2013, Government Says

Cyprus’s economy might contract as much as 13 percent this year under the weight of austerity measures and a restructuring of the country’s banks, the government spokesman said.

“The recession may not be 8.7 percent as is estimated; it may reach 13 percent,” Christos Stylianides said in comments carried on state-run CyBC today. Before Cyprus’s bailout, the European Commission forecast the economy would shrink 3.5 percent in 2013.

Cyprus’s government wound up talks this week with the so-called troika of officials representing the commission, the International Monetary Fund and the European Central Bank on the terms for the country’s 10 billion-euro ($12.8 billion) rescue. The accord was due to be discussed at a euro working group meeting of finance officials in Brussels today.

A draft of the aid deal targets a primary surplus of 3 percent of gross domestic product in 2017 and 4 percent in 2018, with a primary deficit of no more than 2.4 percent this year, according to an e-mailed copy of the final draft that was distributed to lawmakers in Nicosia today.

The bailout also includes public-sector wage cuts in 2014 and some tax increases, according to Stylianides, who said that the government didn’t have much room to maneuver in the deliberations with the troika. The banking sector will be reorganized in an orderly manner, Stylianides said.

Troika Talks

Cyprus sought aid in June last year, becoming the fifth euro-area nation to request outside help after Greece, Ireland, Portugal and Spain. It fell to the government of Nicos Anastasiades, elected on Feb. 24, to complete talks with the troika.

Additional permanent measures of at least 351 million euros, or 2.1 percent of GDP, will have to be outlined and approved by the troika before they are submitted to Cyprus’s parliament, the draft shows. The measures must be adopted before the first installment of bailout funds can be paid, it said.

On March 25, Cyprus reached agreement with euro governments to impose losses on uninsured depositors at the country’s two biggest banks, Bank of Cyprus Plc and Cyprus Popular Bank Pcl, as part of negotiations for its bailout. Cyprus Popular Bank is to be wound down. Cyprus’s banks were shut for nearly two weeks to avoid capital flight, reopening on March 28 with controls limiting financial transactions.

Leaving the 17-nation euro region “would be like jumping into the abyss” and is not an option for Cyprus, said Stylianides.

With implementation of the right measures and investment, Cyprus could see an economic turnaround in 2014, he said. “We can create the conditions to have growth more quickly than the troika expects,” Stylianides said.

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