The European Commission is to establish a special taskforce for Cyprus to stimulate new areas of economic activity in the country, as concerns grow about the impact of the bailout on the Cypriot economy.
The size of Cyprus’s banking industry, which along with tourism is the state’s main industry, will be radically reduced under the agreement to restructure the banking sector brokered on Sunday night.
Thousands of jobs will be lost as a result of the closure of Laiki Bank, and the restructuring of the country’s largest bank, Bank of Cyprus, while the decision to impose losses on large depositors is likely to lead to the outflow of deposits from the island’s remaining functioning banks.
Reluctant
Cypriot authorities had been reluctant to impose losses on larger depositors for fears it would damage the country's status as an offshore financial centre. But they were effectively forced to accept a "bail-in" of uninsured depositors and yield to EU demands that deposits of less than €100,000 would be protected in line with the EU guarantee.
Some analysts predicted yesterday that gross domestic product could fall by a fifth. Barclays Capital and Soc Gen both estimated Cyprus’s GDP would drop by 20 per cent by 2017. “Cyprus will in all likelihood require additional financial assistance further down the road,” Soc Gen said.
A “difficult process of deleveraging in the financial sector” was ahead, European Commission president José Manuel Barroso said yesterday, stressing that the Cypriot economy had been too focused on a financial system that was no longer sustainable. However, he declined to comment on the projected impact the changes would have on GDP.
“In this exceptional, extremely difficult circumstance, it is quite risky to make any macroeconomic forecast in the medium to long term,” he said. The outcome depended a lot on the way the programme was implemented, he added.
European Investment Bank
Announcing details of the new taskforce, which will be based in Brussels with staff in Nicosia, Mr Barroso said Cyprus needed to find "new sources of growth", though he declined to specify what specific industries might be targeted. The European Investment Bank, an EU institution which borrows money on capital markets and lends money for projects in member states at low interest rates, is likely to play a role.
Except for the two main banks which are being restructured, Cyprus’s banks are expected to reopen today.
EU internal markets commissioner Michel Barnier said the introduction of capital controls for Cyprus’s banks should be temporary.
“Any measures to restrict or limit freedom of movement may only be enacted exceptionally and temporarily and that is what has been requested by the Cypriot authorities,” he told reporters in Brussels. “This is a restriction on movement that may only last a few days,” he said.
Capital control measures designed to guard against the outflow of deposits when banks reopen could include a limit on ATM withdrawals and restrictions on money transfers.
