Cyprus Bailout Swells to $30 Billion

An even bigger challenge for Cyprus

By Jeurgen Baetz

The cost of bailing out Cyprus has swollen to euro 23 billion ($30 billion), with the crisis-hit country having to take on the lion’s share of the measures needed to avoid bankruptcy, according to a draft document by the country’s international creditors.

The draft document, obtained by The Associated Press Thursday, says the country will have to find 13 billion euros ($17 billion) — an increase on the 7 billion euro contribution agreed during the country’s chaotic bailout talks last month. The money will be raised by imposing heavy losses on large bank deposits, levying additional taxes, privatizations and a part-sale of the central bank’s gold reserves.

“The sheer size of the increase has underlined the extent of the enormous challenges facing Cyprus itself,” Jonathan Loynes of Capital Economics said in an analyst note.

The so-called troika of international creditors — the European Commission, the European Central Bank and the International Monetary Fund — are set to grant the Mediterranean island nation a 10 billion euros ($13 billion) rescue loan package to recapitalize Cyprus’s shaky banking system and keep the government afloat. For its side of the deal, Cyprus was supposed to contribute 7 billion euros to the rescue.

In the latest draft document, however, the troika has revised the overall cost of bailing out Cyprus amid a gloomier economic outlook for the country, adding an extra 6 billion euros to the bill.

The Cypriot government blamed the gulf between the original total and the new 23 billion euro bill on the previous left wing administration and the time it took to properly negotiate a bailout — delays which pushed the cost of recapitalizing its banks much higher.

Government spokesman Christos Stylianides accused former President Dimitris Christofias of failing to “take responsibility and complete indecisiveness” in promptly negotiating a bailout.

As part of the original deal, Cyprus agreed to raise the 7 billion euros mostly by overhauling its bloated banking industry and tax increases. This would involve breaking up its second-largest bank, Laiki, and imposing losses on savers who have more than 100,000 euros there and in another lender, the Bank of Cyprus.

The draft creditor document now shows that the troika now expects the break-up of Laiki to raise 10.6 billion euros, which will be used to prop up the Bank of Cyprus.

The document also says Cyprus will have to sell off parts of its gold reserves — raising another 400 million euros in the process — a first for a bailed-out European country.

However, Cyprus Central Bank spokeswoman Aliki Stylianou said that the Central Bank Governing Board “is not considering any such gold sale at this time.”

The eurozone’s 17 finance ministers are gathering Friday at a meeting in Dublin where, they are expected to discuss a raft of documents spelling out the details of the assistance package for Cyprus.

The measures in the draft document highlight how Europe’s financially more stable creditor countries are becoming increasingly impatient with bailing out their southern neighbors and are inflicting harsher terms on those in need of assistance. Cyprus is the fifth eurozone country to receive bailout loans after Greece, Ireland, Portugal and Spain.

The troika is seeking to keep its contribution at 10 billion euros, putting the onus for finding the missing funds on Nicosia. However, there are concerns among analysts that the hit to Cyprus’s economy from the terms of the bail-out deal may be too much for the country to bear.

Cyprus is expected to gain 1.4 billion euros from privatizations over the next few years. However, similar demands on Greece, which has received 240 billion euros in bailout loans so far, had to be revised downward several times as selling state assets in the midst of a recession has proven tricky.

The creditors’ underlying growth assumptions for Cyprus are also raising concerns: If the reality will be worse than the forecast, another bailout or additional revenue-raising measures might be necessary to plug the resulting shortfall.

Cyprus’s tiny annual economic output of about €18 billion — or less than 0.2 percent of the eurozone total — is expected to plunge by 8.7 percent this year, and another 3.9 percent in 2014, according to another official document by the creditors.

Several analysts, however, have cautioned that Cyprus’ economy might shrink by more than 10 percent this year alone in the wake of the harsh banking restructuring and the other measures required to qualify for the eurozone bailout.

“If everything goes according to plan, the growth figures might at least be in a realistic range, if too optimistic,” said Christoph Weil of Germany’s Commerzbank. “If there are any problems — and there are significant downside risks — then it could be much worse, and a combined contraction of 20 percent is within the range of the possible,” he said.

In 2015, the country is forecast to return to growth of 1.1 percent. Such a relatively quick turnaround might prove quite optimistic if Greece is any guideline — the country is in its sixth year of a protracted recession and sees unemployment hovering at around 27 percent.

“I don’t think this is realistic. The country must go through a painful and wide-ranging restructuring of its economy, with half of its banking sector evaporating, I think it will take at least three years for the economy to bottom out,” said Weil.

Other analysts, however, were more upbeat.

“The downward trend in Cyprus won’t be as protracted as in Greece,” said economist Ulrich Kater of Germany’s DekaBank.

“To begin with, Cyprus has a much higher per-capita income than Greece. Secondly, it also has the benefit of being a small, homogenous economy with a more efficient administration, meaning it will be easier for the government to turn things around,” he added.

Far on the horizon, Cyprus also plans to gather new revenues from exploiting significant offshore natural gas finds, but any proceeds may well be a decade away and are fraught with political uncertainty given rival claims by Turkey and Israel on some of the gas deposits.

The rescue loans will further increase Cyprus’ debt burden, which is set to peak at 126 percent of GDP in 2015, according to the documents. That would be one of Europe’s highest debt burdens, putting a serious question mark on the feasibility of returning to the markets to refinance its debt in the following years.

Capital Economics’ Loynes said the economic projections contain “a considerable degree of optimism” given the uncertainties of unwinding the banking sector and tightening the government’s budget.

“This could force Cyprus to undertake further fiscal tightening to meet its borrowing targets and casting doubt over the sustainability of the bail-out,” he said.