Cyprus’ crisis-hit economy could shrink by 13 percent this year, a government official warned on Thursday, as the head of the European Central Bank (ECB) insisted the chaotic rescue of the troubled island was not a model for future bailouts.
“In 2013, the recession may not be 8.7 percent as is estimated; it may reach 13 percent,” Cypriot government spokesman Christos Stylianides said on state-run TV.
The stark economic warning from the island, after a two-week bank closure that pitched the eurozone back into crisis, comes as the ECB announced on Thursday that it was leaving interest rates on hold.
Cyprus finalized the terms of a 10 billion euro (US$12.9 billion) bailout this week with the troika of creditors, the EU, the ECB and the IMF. The island nation secured a financial lifeline last month to avert financial collapse, at the price of imposing losses on depositors with holdings above 100,000 euros at Cyprus’ two largest banks, the Bank of Cyprus and Laiki.
Cyprus is determined to stay in the euro after its painful rescue.
“Leaving [the eurozone] would be like jumping into the abyss,” Styliandes said.
Speaking in Frankfurt, Germany, ECB President Mario Draghi said that Cyprus’ bailout was “no template” for other potential bailouts, words intended to calm investors who fear that bank depositors are now a target.
Dutch Finance Minister Jeroen Dijsselbloem, who also chairs the eurogroup, sparked panic selling on European stock markets last month, when he said a bailout levy on depositors, possibly including savers with assets under 100,000 euros, could be a model for future bank bailouts.
EU rules guarantee the savings of small depositors, and Draghi insisted on Thursday this should remain the case.
“You do not touch uninsured depositors,” he said, adding that Dijsselbloem’s words had been misunderstood.
The ECB president also laid into Cypriot officials for the botched plan to bring small savers into the bailout.
“That was not smart, to say the least, and it was quickly corrected the day after in the eurogroup conference,” he said.
Draghi said there was “consensus” among the bank’s 23-strong governing council to leave interest rates on hold at 0.75 percent, a decision thrown into stark relief as the Japanese central bank embarked on an aggressive program of monetary stimulus. The Italian central bank president insisted “we stand ready to act” if the economy continues to decline.
Bank watchers saw these smoke signals as signaling an imminent rate cut, and German, Austrian and French bond yields slid in fear of a rate cut.
Although the decision to hold rates was largely expected, markets gave the decision a cool response and the euro fell to a four-and-a-half-month low against the US dollar, but later rallied to a 0.2 percent rise on the day.
Draghi predicted “a gradual recovery” in the second part of the year, although the eurozone is being blitzed by gloomy economic data.
Manufacturing and services output in the 17-country currency club fell by more than expected last month, suggesting the eurozone suffered a sixth successive quarter of GDP contraction in the first quarter of this year, analysts said.