September 22, 2019

Cyprus Bailout to Cost More Than Predicted, Creditors Say

ATHENS — After a chaotic month in which Cyprus was pushed to the brink of default and a possible exit from the euro zone, Cypriots knew things would get bad. But not this bad.

According to a bleak assessment released Thursday by its European partners, Cyprus will fall into a downward spiral for at least the next two years, with the economy contracting up to 12.5 percent over the period as the country prunes back a dangerously outsize banking sector that had ballooned to more than five times gross domestic product.

And because the economy will do worse than expected, Cyprus must soon raise €13 billion — nearly twice the amount the government thought it would have to come up with just a month ago — in order to keep its debt and deficit from spinning out of control and to meet the terms of a desperately needed €10 billion, or $13.1 billion, international bailout secured last month by the newly elected president, Nicos Anastasiades.

A shrinking economy means the country’s budget deficits are likely to grow, so the government will need to raise more money to keep the deficits within limits set out under its bailout agreement. Because the government has also committed to improving the health of its banks, it must come up with yet more money to ensure that the lenders have adequate capital, particularly critical if their loan losses start to snowball as the economy slumps.

“In the short run, the economic outlook remains challenging,” the European Commission said in the report, which details the conditions that the Cypriot government agreed to meet in order to obtain the financial lifeline from the so-called troika: the International Monetary Fund, the European Central Bank and the commission.

So strapped is Cyprus that it has agreed to sell its prized assets to raise money. Chief among them is part of the gold reserves held by the central bank. In what would be the first such sale by a central bank in the euro zone, Cyprus had already agreed to sell €400 million worth of gold, or an estimated 10 tons from its 13-ton stash.

Cyprus’s coffers have run dry as it scrambles to keep its banks from collapsing. On Tuesday, the newly appointed finance minister, Harris Georgiades, said that without the bailout, public funds would run out by the end of April.

Cyprus is under pressure from the troika to speed development of the natural gas reserves that have been discovered off its coast. The hope, as stated in the commission’s assessment, is that the proceeds would be used to keep Cyprus’s debt under control as the economy slumps.

But this could set off a hornet’s nest of geopolitical tension. Turkey, which occupies the north of Cyprus, last month challenged any move by the nation to speed exploration, especially if it means Russian involvement. Turkey warned that it may “act against such initiatives if necessary.”

In the meantime, the commission described a bleak future for Cyprus, at least in the short term.

The nation was required to fold part of its second-largest financial institution, Laiki Bank, known also as Cyprus Popular Bank, into the largest, the Bank of Cyprus, under the terms of the bailout. Numerous companies of all sizes are likely to go shut down as banks cut back on issuing credit. Other lucrative businesses that fed off the bloated financial services industry in Cyprus are also likely to suffer. Real estate prices, which have already begun to fall as a property bubble collapses, are expected to deteriorate further.

Company registered in Cyprus, even as a simple mailing address, are likely to look elsewhere as the corporate tax rises to 12.5 percent from 10 percent. That is still the lowest rate in the euro zone next to Ireland, but it removes one big draw for the country.

Meanwhile, the commission continued in its report, people and businesses that held uninsured deposits at the two largest banks will see a “loss of wealth” as the government takes the unprecedented step of confiscating up to 60 percent of their funds to meet the terms of the bailout deal.

That, combined with extraordinary restrictions on withdrawals in order to prevent a bank run, will in turn cut down on consumption and business investment, the commission added. That will further scar an economy that had already started to slow two years ago as Europe’s long-running debt crisis set in.

Analysts say that once the restrictions are lifted, people are likely to take their money out of Cypriot banks en masse, since few believe the government’s promise that the bank levy being imposed now will be a one-time measure.

A fresh scandal blew through the halls of power this week when the central bank sent a report to Parliament showing that 6,000 people had withdrawn large sums of cash from Cypriot banks in the two weeks leading up to the island’s first bailout agreement. That deal fell apart after the government and European leaders temporarily agreed to a plan that would have confiscated savers’ insured deposits to help Cyprus raise the money its creditors required in exchange for the bailout.

Cypriot banks, already near collapse because of losses from bad loans made mostly in crisis-wracked Greece, as well as losses from holdings of Greek government bonds, could come under new strain, the commission warned, as loans to businesses and individuals start to sour along with the economy.

Unemployment is already near 15 percent and is expected to surge as the financial industry winds down. In the meantime, efforts to recast the economy to lean more heavily on tourism will probably take years.

The report concluded that the only real hopes for the moment seemed to be to drill for natural gas, or for the overall European economy to turn around.

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Greece Resumes Talks With Creditors

The talks, part of the process by which Greece must satisfy the lenders’ conditions in order to receive additional installments of bailout money, are the sort of painstaking discussions that Cyprus will soon be undertaking as part of the Cypriot government’s newly arranged €10 billion, or $13 billion, rescue. The Athens discussions are a reminder that working through a euro zone bailout can be a long march, requiring many politically unpopular steps by recipient governments.

The Greek government is trying to secure the release of two slices of rescue funding. One is a €2.8 billion allocation that had been due in March, and is conditional on Greece’s meeting its pledge to streamline the civil service. The other is a €6 billion payout for the second quarter of this year, which will be released only if inspectors are satisfied with the overall progress of the country’s economic overhaul.

On Thursday, addressing a joint conference with the European Commission at the Athens Concert Hall on improving the use of European funding, Prime Minister Antonis Samaras of Greece pointed to the first signs of economic recovery, citing government figures showing that hiring in the private sector outpaced layoffs last month for the first time in three years.

Talks broke off in March between the government and representatives of the so-called troika of creditors: the International Monetary Fund, the European Central Bank and the European Commission.

The resumed negotiations are to focus on the public-sector overhaul, with the troika expected to renew demands for laying off thousands of civil servants. Also high on the agenda is an unpopular property tax that was introduced as an emergency levy in September 2011 and which the government now wants to replace with a levy that imposes lower charges but also taxes farmland to offset the lost revenue.

An internal dispute over the troika’s demands for the extension of the tax had shaken the fragile coalition government in Greece. But last-ditch talks on Wednesday night produced a consensus. The finance minister, Yannis Stournaras, presented the government’s revised property tax proposal to the inspectors on Thursday during a three-hour meeting that touched on “all outstanding issues,” said a ministry official, who as a matter of policy could not be identified by name.

There was no response by the foreign envoys to the ministry’s proposal, according to the official, who said fresh talks would he held “soon.”

With household incomes down by a third after three years of austerity measures, and unemployment at nearly 27 percent, another point of contention is the number of installments that cash-strapped Greeks should be allowed in paying off about €55 billion in overdue taxes, social security debts and fines imposed for nonpayment of taxes.

The continuing recapitalization of Greek banks is also expected to figure prominently in the negotiations. Troika officials are said to harbor reservations about a merger under way between two major Greek lenders, National Bank of Greece and Eurobank, which are considered too big to let fail.

Troika representatives are also pressing Athens to step up efforts to raise money by selling state-owned assets. Notwithstanding the sale this week of diplomatic properties in London, Brussels, Belgrade and Nicosia, for a total of €41.1 million, the Greek government has little progress to report on the privatization front.

The aim is for this round of talks to conclude by April 14, before the next summit meeting of euro zone finance ministers.

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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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