As Cypriots headed to the polls on Feb. 24 to elect a new President in a run-off between the frontrunner, Conservative Nicos Anastasiades and the Communist-backed Stavros Malas, the cost of a bailout to save the island’s economy from collapse is rising.
Cyprus’ banks, along with other investors holding Greek bonds, took 74 percent losses last year under a Greek scheme to reduce its debt, and the bill is mounting as an American consulting firm, Pimco, said as much as 9 billion euros, or $11.8 billion is needed in rescue monies, the news agency CNA reported.
But it could get even worse. Pimco submitted its report this month but the Central Bank said the amount would not be made public until it signs a bailout with the Troika of the European Union-European Central Bank-International Monetary Fund.
In a draft agreement with the troika of lenders, the amount for the banks had been set at up to 10 billion euros ($13.2 billion) as part of a total package which could reach 17 billion euros, $22.42 billion, matching the island’s Gross Domestic Product, making it unlikely the loans could ever be repaid, some analysts have said.
The government said that international lenders should adopt Pimco’s baseline scenario – reported to be 5.98 billion euros, or $7.88 billion – as it would ease the terms of the loan. But a Pimco document leaked in the Cypriot media week showed the US firm expects the island’s economy to worsen as it slides deeper into recession, Agence-France-Presse reported.
Its adverse scenario predicts higher unemployment, bigger wage cuts and falling property prices – which all have a knock-on effect on people’s ability to pay bank loans. “We do believe it reasonable to expect significant wage reductions for public sector workers which could have a material impact on borrowers’ ability to meet debt service payments,” Pimco said in a leaked letter to the Central Bank.
The bank said it “strongly disagreed” with the methodology Pimco used to discount future bank revenue inflows. “The central bank supports the speedy signing of a draft memorandum as agreed with the troika as prolonged uncertainty harms the economy, especially the financial system,” it said, according to AFP.
Anastasiades, said that – expecting he’ll win easily – he has already begun negotiating with one unnamed EU country and with Russia for a bridge loan until the Troika delivers. But the task won’t be easy as the Troika is pushing for the same kind of harsh austerity measures that have plunged Greece into a deep recession.