Cyprus: The Troika comes for more

Cyprus forced to find extra €6bn for bailout, leaked analysis shows 

Less than a month after deal was agreed bailout bill has risen to €23bn – larger than entire year's output from country's economy

the Guardian,

11 April, 2013

Cypriot politicians have reacted with fury to news that the crisis-hit country will be forced to find an extra €6bn (£5bn) to contribute to its own bailout, much of which is expected to come from savers at its struggling banks.

A leaked draft of the updated rescue plan, which emerged late on Wednesday night, revealed that the total bill for the bailout has risen to €23bn, from an original estimate of €17bn, less than a month after the deal was agreed – and the entire extra cost will be imposed on Nicosia.

Visiting Athens, the Cypriot parliament's president, Yannakis Omirou, said the tiny island nation had been "served poison" by its EU partners.

Cyprus's politicians had already faced intense domestic political pressure for agreeing to impose hefty losses on savers at two struggling banks to fulfil its eurozone partners' original demand that they contribute €7bn.

But after a more detailed "debt sustainability analysis" showed that the black hole in the island nation's finances is far deeper than first thought, the total cost for Cypriot taxpayers and depositors has now been set at €13bn, with €10bn to come from its eurozone partners and the International Monetary Fund. The €23bn overall bill is larger than an entire year's output from the Cypriot economy.

Jonathan Loynes, of thinktank Capital Economics, said the rising cost echoed the pattern in other bailed-out states. "They don't know where there might be more black holes: I wouldn't be that surprised if there were to be another shock in the next week or so," he said.

The new draft bailout plan, which will be discussed at a meeting of finance ministers in Dublin on Friday, underlined the botched nature of the initial agreement, which was hurriedly cobbled together in March and had to be redrawn after the Cypriot parliament rejected the idea that depositors holding less than €100,000 – whose savings are meant to be insured – would face deep losses.

A new decree that will remain in place for seven days lifts all restrictions on transactions under €300,000 to re-energise cash-starved domestic businesses that had difficulty paying suppliers and employees. Moreover, the daily limit on transactions outside of Cyprus not requiring prior approval is raised from €5,000 to €20,000.

However, a daily cash withdrawal limit of €300 remains in place, as well as a ban on cashing checks. The decree also introduced a new restriction on opening new accounts in banks where customers had never done business before.

Much of the extra €6bn is expected to come from savers – though Cyprus is also expected to be forced to sell €400m of gold reserves, renegotiate the terms of a loan with Russia, and impose losses on Bank of Cyprus creditors. There was also a suggestion that holders of €1bn worth of Cypriot government bonds could be urged to agree to a debt swap, reducing the country's repayments. That could signal a messy period of negotiation and uncertainty.

"Instead of solidarity from our European partners we have been served poison," said Omirou.

In Nicosia, the island's divided capital, the reaction was no less ferocious, with many predicting that the sheer burden of the bailout for a country whose economy is shattered would inevitably spur calls for Cyprus to leave the single currency.

"We will resist. Every alternative scenario for the exit of our country from the troika and the memorandum now has to be studied," said Giorgos Doulouka, spokesman of the main opposition Akel party. "They are eating us alive. What Greece suffered in three years, Cyprus is experiencing in a matter of weeks. All the extra measures that the government will now have to take will be at the expense of ordinary people. It is outrageous."

It also emerged on Thursday that Mario Draghi, president of the European Central Bank, has waded into the increasingly febrile debate about the country's future, by warning the government in Nicosia against ditching the governor of its central bank, Panicos Demetriades. In a letter to the president, Nicos Anastasiades, Draghi warned that sacking a central bank governor without due cause is against EU law.

Some analysts pointed out that the projections for Cyprus's economy on which the bailout plans are based could prove to be over-optimistic, as has repeatedly been the case in Greece, potentially prompting a fresh bailout.

Cyprus's economy is expected to suffer a deep recession, with GDP contracting by 8.7% in 2013, and 3.9% next year. However, a government spokesman in Nicosia last week suggested the downturn this year could be far deeper, perhaps up to 13%, which could throw the bailout plans off course within months.

Simon Derrick, chief currency strategist at BNY Mellon, questioned the projection that the economy would recover within two years, recording growth of 1.1% in 2015. "Why would confidence return and make people want to put money into Cyprus?" he said. "The economy is three things – banking, property and tourism. You're not going to rebuild an offshore banking industry in Cyprus; and in tourism it's competing against Turkey, where the currency is down 50% since mid-2005."

Capital controls imposed to prevent deposits flooding out of the country look likely to stay in place for some time, at least until the hefty "levy" is imposed on savers to recoup the costs of the rescue. "The history of these things is that once you have got capital controls, it's extremely difficult to get rid of them," said Loynes.