An official at a top grouping of banks said on Thursday there was still a distinct possibility that Cyprus could exit the eurozone, despite the 10 billion euro (US$12.8 billion) IMF-EU bailout negotiated last week.
Philip Suttle, the deputy managing director and chief economist of the Institute of International Finance (IIF), which represents about 450 banks around the world, said that Cyprus will face more strain from a sharply contracting economy with few options for kickstarting growth.
Recovering without the option of a devaluation — which it would have outside the eurozone — will be extremely difficult for the Cyprus economy, heavily reliant on its now-damaged role as a tax haven.
The Mediterranean island country, which was forced to shut its banks for two weeks to organize against a total financial collapse, now faces economic “depression,” he said, with the IIF predicting as much as a 20 percent crunch in economic output by 2015.
“This is the first case where you can see some kind of exit as a very distinct possibility,” Suttle said of Cyprus.
“Cyprus is suffering all the costs associated ... with the euro and not the benefits at the current time,” he said.
“The only escape valve is devaluation,” which Cyprus cannot undertake as long as it shares the euro, he said.
Moreover, the Cyprus crisis will continue to hurt the broader eurozone economy, especially in the more frail countries, he said.
“The contagion spillover that we worry the most about is, what is it going to do to weaker banks or banks that are seen to be weaker in weaker economies,” he said.”It’s almost certain to raise the funding costs ... of banks in particular in Spain, Portugal, Italy. It kind of compounds the challenges being faced by these countries.”
Cyprus has no intention of leaving the European single currency, Cypriot President Nicos Anastasiades said yesterday, assuring Cypriots the situation was “contained” in the wake of a tough bailout deal with the EU.
Anastasiades spoke a day after banks reopened their doors following an almost two-week shutdown to prevent a run on deposits by panicked Cypriots and wealthy foreign depositors as the Mediterranean island flirted with bankruptcy.
“We have no intention of leaving the euro,” Anastasiades told a conference of civil servants in the capital, Nicosia.
“In no way will we experiment with the future of our country,” he said.