International lenders have softened the terms of Cyprus's
bailout package by giving the island an extra year to meet budget
targets, according to a draft copy of its loan agreement, as the
country struggles with the fallout out of its worst financial
crisis in decades.
Euro-zone countries and the International Monetary Fund say
Cyprus will have to meet a 4% primary budget surplus by
2017--versus a previously negotiated target by 2016--as the shock
of the country's two-week-long banking crisis promises to send the
island's economy into a recessionary tailspin. For this year,
Cyprus is forecast to post a primary budget deficit--which
represents the hole in the central government's finances before
taking into account debt payments--equal to 2.4% of gross domestic
product.
"Putting public finances on a sustainable path is of overriding
importance in order to stabilize the economy and to restore the
confidence of companies, citizens and foreign investors in the
longer-term economic prospects of Cyprus," according to a draft
agreement seen by The Wall Street Journal.
Cyprus has promised to deliver on a long list of overhauls,
spending cuts and tax increases in exchange for a 10 billion euro
($12.8 billion) rescue package needed to prevent default, including
a drastic overhaul of its oversized banking sector. Under the deal,
Cyprus has closed its second-biggest lender, Cyprus Popular Bank
PCL (CPB.CP), also known as Laiki Bank, and is moving its healthy
assets to Bank of Cyprus PCL (BOCY.CP), the island's biggest
bank.
Cyprus's central bank says depositors with more than 100,000
euros in Bank of Cyprus could lose between 40% and 60% of their
money, while uninsured depositors at Laiki may only see one-fifth
of their money returned.
The government estimates 19,000 depositors at Bank of Cyprus
will be affected, many of whom analysts believe are Russian
individuals and small- and medium-sized businesses. Most major
Russian companies have said they had limited exposure to the
situation in Cyprus.
Russia's first deputy prime minister said his government won't
help Russians who stand to lose a substantial part of their
deposits in Cypriot banks, but might consider bailing out
state-owned companies if any are seriously affected by the banking
crisis on the island.
"If someone loses money, sorry, but the Russian government will
take no action in this situation," Igor Shuvalov told Rossiya 1
television late Sunday. "If there is a serious loss from a company
with state participation, we would be ready to consider it publicly
and transparently here in Russia, but this would not necessarily
help Cyprus."
Cyprus's race to avert a financial collapse resulted in the
temporary shutdown of its banking sector and the imposition of
capital controls last week. The moves have shattered confidence in
the island's all-important off-shore banking industry and raised
questions about its future inside the euro.
Economists are now slashing their forecasts for the country's
tiny EUR17.5 billion economy, which until last week was officially
forecast to shrink 3.5% this year. Some now predict the blow to
Cyprus's financial sector, which accounts for about half of the
nation's economic activity, will push the economy deep into
recession this year, imperilling the government's ability to meet
its budget targets. Several private-sector economists say Cyprus's
economy, a year in recession, could contract by a double-digit rate
this year.
With Cypriot officials expecting to seal its bailout with
international creditors in coming days, government spokesman
Christos Stylianides said Monday Cyprus wants to negotiate still
easier terms and is aiming to push its primary budget target out
even further, to 2018.
The lending agreement foresees Cyprus introducing austerity
measures valued at EUR351 million this year, amounting to 2.1% of
GDP, which include raising the corporate tax rate to 12.5% from
10%, increasing taxes on alcohol and tobacco products, and raising
the island's value-added tax rate to 18% from 17%.
Write to Stelios Bouras at Stelios.Bouras@dowjones.com
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