August 7, 2020

I.M.F. and Europe Set Tough Terms for Cyprus Bailout

The other €9 billion, or $11.6 billion, of the bailout money is to come from the other 16 euro zone countries whose approval of the terms of the bailout deal are still required.

“This is a challenging program that will require great efforts from the Cypriot population,” Christine Lagarde, the managing director of the I.M.F., said in a statement issued by the fund, which is based in Washington.

The I.M.F.’s commitment follows completion of a memorandum of understanding the organization has drafted with Cyprus and the other two international organizations involved in the bailout, the European Central Bank and the European Commission.

Though it has not yet been made public, officials say the document catalogs budget cuts, the privatization of state-owned assets and other conditions Cyprus must meet to receive its periodic allotments of bailout money, amounting to €10 billion.

The agreement is another strong dose of medicine for Cypriots, who last month agreed to restructure an outsize banking sector by forcing huge losses on bondholders and big depositors in the country’s two biggest lenders.

Officials from the Cypriot government, which still needs its Parliament’s approval of the terms of the memorandum, sought to put a positive spin on the deal.

“This is an important development which brings a long period of uncertainty to an end,” Christos Stylianides, a spokesman for the Cypriot government, said in a statement made available Wednesday.

The bailout agreement “should have taken place a lot sooner, under more favorable political and financial circumstances,” said Mr. Stylianides, who was apparently referring to infighting in Cyprus about responsibility for the debacle.

Even before the bailout deal, the Cypriot economy was expected to shrink 3.5 percent this year with unemployment hitting nearly 14 percent. Now, under the strict bailout measures, some experts predict the economy could contract 5 percent or more this year, sending unemployment even higher.

The memorandum will not be made public before euro zone governments review it, Olivier Bailly, a spokesman for the European Commission, said at a news conference on Wednesday. Euro finance ministers will hold an informal meeting next week in Dublin, where they might give their backing, Mr. Bailly said.

Full legal approval, though, is expected only after the Parliaments in some euro area countries like Finland and Germany, which are helping to pay €9 billion toward the package for Cyprus, vote on the deal.

If those approvals are completed by the end of month, Mr. Bailly said, Cyprus could receive its first aid payment in May.

The Cypriot authorities on Tuesday described elements of the agreement that they saw as favorable.

Mr. Stylianides, the Cypriot spokesman, said the deal safeguarded important parts of the economy by keeping potentially valuable deposits of natural gas in offshore waters under Cypriot jurisdiction, and by winning two more years, until 2018, to hit deficit targets and carry out privatizations.

Mr. Stylianides also said the government saved the jobs of contract teachers and of 500 civil servants, and had overcome demands by the international lenders to tax dividends.

But the memorandum could be hotly contested by the Cypriot Parliament, where many lawmakers have criticized crisis measures that already have been taken, like capital controls — tight restrictions on transfers and withdrawals of money — that threaten to make a bleak economic outlook even worse.

In a change partly aimed at easing those tensions, the government in Nicosia on Tuesday appointed a new finance minister, Harris Georgiades, to replace Michalis Sarris, who resigned. Mr. Sarris has been criticized at home and abroad for his handling of the crisis.

Mr. Georgiades, who had been the deputy finance minister, said Wednesday that capital controls would be lifted “gradually” and that the country would meet all of its bailout targets.

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