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Troika: Cyprus’ first bailout assessment positive

July 31, 2013

NICOSIA, Cyprus (AP) — Cyprus is making good progress in meeting the conditions of its multibillion-euro bailout, but the high level of uncertainty over its economic outlook means that authorities must remain vigilant, the country’s international creditors said Wednesday.

International Monetary Fund official Delia Velculescu said Cyprus’ 23 billion euro ($30.5 billion) bailout deal remains on track, adding that the country’s authorities have outlined an “ambitious agenda” so that it can stick to the agreement’s terms.

“Still, with large risks still clouding the outlook, fiscal prudence and strong and timely policy implementation are critical for the program’s success,” Velculescu said at a press conference to mark the end of the creditor’s first assessment.

In order for Cyprus to receive a 10 billion euro loan agreed back in March from its euro area partners and the IMF, savers in the country’s two largest banks were forced to take huge losses over savings over 100,000 euros ($132,840). The money would be used to replenish the banks’ depleted capital buffers.

The move crushed confidence in the country’s banking sector, prompting Cypriot authorities to impose restrictions on money withdrawals and transfers for all banks to prevent a run. Christopher Pissarides, a senior economic advisor to Cyprus’ president, indicated that restrictions may not be fully lifted for another two years.

Velculescu said Cypriot authorities are drawing up a “roadmap” that will outline when restrictions will be relaxed in a way that it won’t trigger a massive outflow of cash. Some restrictions have already been lifted to keep businesses going.

She said the fact that the country’s biggest Bank of Cyprus — which merged with parts of the now defunct Laiki Bank — has now been fully recapitalized under a restructuring plan is a “key step” for the lender to return to working normally.

But she warned that much more needs to be done for the bank to adapt to the country’s new economic realities. Cyprus’ economy is projected to shrink by a cumulative 13 percent over this next year and a half. It has already seen the unemployment rate reach 17 percent.

Under the bailout terms, Cyprus needs to achieve a budget surplus of 4 percent of gross domestic product by 2018 in order to keep its debt under control. To achieve that, banks need to pump money back into a cash-starved retail sector for the economy to get moving again.

Velculescu said Cyprus’ extensive cooperative bank network, which also being overhauled, will be recapitalized with creditors’ money loaned to Cyprus and won’t require depositors to take a hit.

On the upside, Velculescu said that a raft of tax increases and spending cuts targeting the bloated public sector already introduced have yielded better-than-expected results. However, she warned Cypriot authorities not to let up in their efforts.

Cyprus Finance Minister Harris Georgiades said despite the good news, major challenges still lie ahead for the country and that the government remains committed to meeting all bailout targets.

“Efforts will continue and will intensify,” Georgiades told reporters.

Georgiades said although any more spending cuts aren’t expected this year, he warned that more harsh measures are in store for 2014.

Cyprus’ assessment will be approved by other euro area finance ministers and the IMF in September. Approval will pave the way for the disbursement of €1.5 billion euros ($2 billion) from Europe’s bailout fund and 86 million euros ($114 million) from the IMF.