Analysis: Bailout sends Cyprus on uncertain quest for new growth model

Wed Apr 3, 2013 11:20am EDT
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By Jan Strupczewski

BRUSSELS (Reuters) - Cyprus's bank restructuring, a condition for international aid it needed to stave off bankruptcy, will force the Mediterranean island to scramble for new ways to generate wealth.

If it fails, international lenders may have to do what they wanted to avoid and which Germany and its northern European allies may baulk at - give Cyprus more money.

Nicosia will get 10 billion euros ($13 billion) over three years from the euro zone and the International Monetary Fund. In return, it will halve its dominant banking sector and hit large depositors to help recapitalize what is left of it.

Because financial services played a vital role in the island's economy - accounting for 9.2 percent of GDP and 5.1 percent of jobs in 2012 according to EU statistics service Eurostat - the fallout will deliver a devastating blow.

Deficit targets agreed between the euro zone and Cyprus in a memorandum of understanding imply that the economy will contract almost 8 percent this year and another 3 percent in 2014.

It is forecast to return to growth in 2015, a view some economists see as optimistic.

"The nature of the rescue has made things worse. That already makes me think if, like in Greece, we will have a series of revisions to growth and therefore to the financing needs of the country," said Nick Kounis, economist at ABN Amro.

Greece has been bailed out twice by the euro zone and IMF since 2010 after projections for debt-cutting and a return to growth consistently proved too optimistic.   Continued...

People wait in front of a branch of Bank of Cyprus to withdraw money from its ATM in Bucharest April 1, 2013. REUTERS/Bogdan Cristel