Cyprus's crisis-hit economy could shrink by 13% in 2013, a government official warned on Thursday, as the head of the European Central Bank insisted the chaotic rescue of the troubled island was not a model for future bailouts.
"In 2013 the recession may not be 8.7% as is estimated, it may reach 13%," 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 finalised the terms of a €10bn (£8.4bn) bailout this week with the troika of creditors, the European Union, the European Central Bank and the International Monetary Fund. 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 at Cyprus's two largest banks, the Bank of Cyprus and Laiki.
Cyprus is determined to stay in the euro after its painful rescue – "leaving would be like jumping into the abyss" Styliandes said.
Speaking in Frankfurt, Mario Draghi, president of the European Central Bank, insisted that Cyprus's bailout was "no template" for other potential bailouts, words intended to calm investors who fear that bank depositors are now a target.
Jeroen Dijsselbloem, the Dutch finance minister 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, 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."
Draghi said there was "consensus" among the bank's 23-strong governing council to leave interest rates on hold at 0.75%, a decision thrown into stark relief as the Japanese central bank embarked on an aggressive programme 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 signalling 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 dollar, but later rallied to a 0.2% 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 in March, suggesting the eurozone suffered a sixth successive quarter of GDP contraction in the first quarter of 2013, according to analysts.
Howard Archer, chief European & UK economist at IHS Global Insight, predicted that further disappointing news would push the ECB to cut interest rates in May. "Not only does further eurozone GDP contraction now seem highly probable in the first quarter, but prospects for the second quarter are looking increasingly worrying. With Eurozone consumer price inflation down at a 31-month low of 1.7% in March, wage growth generally weak and most inflationary measures currently muted, the ECB has ample scope to cut interest rates."
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