Cyprus has been granted an extra year — until 2017 — to achieve a targeted budget surplus of 4 percent as part of bailout negotiations with international lenders, the government spokesman said Monday.
The change is designed to prepare for what could be a deeper than expected economic slowdown as the Mediterranean country is forced to drastically shrink its banking and financial industry.
Under a preliminary agreement with Cyprus’ euro area partners and the International Monetary Fund for billions in rescue money, Cyprus had until 2016 to generate the budget surplus target through spending cuts and tax hikes.
But that deal was based on an earlier forecast that the economy would shrink this year by 3.5 percent of gross domestic product.
A Cyprus government official who spoke on condition of anonymity because he’s not authorized to discuss details of the negotiations said the economy is now projected to contract by some 9 percent of GDP.
For that reason, government spokesman Christos Stylianides said Monday that negotiators now are hoping to extend the deadline to achieve a 4 percent budget surplus even further, to 2018.
Cyprus agreed last week to make bank depositors with accounts over 100,000 euros ($129,000) contribute to the financial rescue in order to secure 10 billion euros ($12.9 billion) in loans. Cyprus needed to raise 6 billion euros ($7.4 billion) on its own in order to clinch the larger package, and banks remained shut for nearly two weeks until politicians hammered out a deal.
To prevent mass withdrawals when the banks reopened March 28, Cypriot authorities imposed a raft of restrictions, including daily withdrawal limits of 300 euros ($384) for individuals and 5,000 euros ($6,426) for businesses. That amounted to the first so-called capital controls that any country has applied in the eurozone’s 14-year history.
Under the terms of the bailout deal, the country’ second largest bank, Laiki, is to be split up, with its nonperforming loans and toxic assets going into a “bad bank.” The healthy side will be absorbed into the Bank of Cyprus.
Big Laiki depositors could lose as much as 80 percent of their money.
Bank of Cyprus savers will lose 37.5 percent and possibly 22.5 percent more, depending on what experts determine over the next 90 days is needed to prop up that bank’s reserves. The remaining 40 percent of big deposits at the Bank of Cyprus will be “temporarily frozen for liquidity reasons,” but continue to accrue existing levels of interest plus an additional 10 percent.