Cyprus stands on the brink of the abyss. Its debts are high, its banks are crippled, its pivotal financial services sector is being dismembered. Now the country’s 800,000 inhabitants and ex-pats have woken up to find that the cost of financial rescue has gone up by €6bn (£5.1bn) in the past month – and they will have to find every last cent themselves.
It goes without saying that the already deeply flawed rescue plan for Cyprus is now a complete and utter dud. Nobody outside of the so-called troika – the European Union, the European Central Bank and the International Monetary Fund – believes the growth and financial projections sketched out in the debt sustainability analysis leaked overnight.
The details of the bailout are as follows. Cyprus will need €23bn to see it through its debt crisis, up from an original €17bn. The troika’s share of the rescue remains unchanged at €10bn – Cyprus will now have stump up €13bn rather than €7bn. It would appear that most of that will come from uninsured bank deposits of more than €100,000. That group of savers will now face losses well in excess of the 10% envisaged under the original plan.
Fresh economic forecasts for Cyprus were included in the sustainability analysis. These are more realistic than the 5% cumulative drop in national output previously envisaged for 2103 and 2014 but not nearly realistic enough. The troika expects gross domestic product to shrink by 12.5% but that looks wildly optimistic in a country that has three main sources of income: financial services (dead in the water); property (ditto) and tourism (cheaper in the Turkish part of Cyprus thanks to a currency depreciation). A 25% drop in GDP over the next couple of years will probably prove closer to the mark.
The figures contained in the analysis look as if they have been massaged to come up with a profile for debt that meets with the approval of the IMF, which believes a burden of much more than 120% of GDP is unsustainable. The chances of debt peaking at 126% of GDP in 2015 is for the birds, even on the troika’s own upbeat economic forecasts.
Cyprus will comfortably miss these debt projections, and on past form that will lead to demands from its creditors for further self-defeating austerity in an attempt to get back on track. Deposit holders will lose even more of their savings, assuming that there is anything left to seize.
So what conclusions can be drawn from this sorry tale? Firstly, that the catastrophic bungling of the past month has been costly, both in terms of the size of the bailout and the message sent out to savers in the rest of the eurozone that their deposits could also be at risk.
Secondly, that Cyprus is seen as expendable by Angela Merkel in run-up to the German elections in September. There were more sensible options available – a more generous bailout, for example – but these have been rejected for fear that German voters would react badly.
Thirdly, that the insistence on continuing with policies that are clearly failing means that the eurozone debt crisis will go on and on.
Finally, unless there is a change of strategy the options for Cyprus are limited; endure decades of pain, secure a second (and perhaps even a third) bailout, or leave the euro.
Πηγή: The Guardian