Less than a month after securing a bailout at the last minute, Cyprus is now under pressure to secure an additional 6 billion EUR worth of funds. According to the Debt Sustainability Report conducted by the European Commission and the ECB, the cost of the EU-IMF bailout has surged from the agreed upon 17.5 billion EUR to 23 billion EUR.
Apparently, the number crunchers at the European Commission realized that Cyprus has to increase its contribution to the bailout in order to compensate for the potential economic slump that’d result from the current austerity measures. At this rate, the total cost of the bailout will now exceed the size of the Cypriot economy!
What makes their predicament worse is that the EU and IMF refused to give anything in excess of the funds included in the bailout terms. “The program is going to be 10 billion EUR as agreed,” remarked Dutch Finance Minister and Eurogroup President Jeroen Dijsselbloem last week.
With no hope of getting extra cash from the EU and IMF, it seems that Cyprus has been backed against the wall with hardly any options left but to undertake additional fiscal tightening.
Unfortunately for Cyprus, additional tightening measures are simply out of its budget. Remember that the country is not only in recession, but it’s also dealing with a 15% unemployment rate that could only go higher. Even the euro zone’s finance ministers are losing confidence as their latest GDP forecasts predict an 8.7% drop in 2013 then a 3.9% contraction in 2014.
Of course, it also doesn’t help that Cyprus has just closed one of its biggest banks and has just depleted deposits of more than 100,000 EUR to help finance its bailout. And then there are additional bailout conditions, which could force the Cypriot government to raise taxes and downsize its banking sector as well as its public sector workforce.
As a country with a ginormous debt and a rapidly deteriorating economy, Cyprus has few options left in terms of getting money to pay off its debts. A few market players believe that Cyprus would inevitably need a second bailout while some are considering the possibility that depositors with more than 100,000 EUR at the Bank of Cyprus would lose at least 60% of their holdings.
More popular options include raising 600 million EUR from additional corporate taxes, adding 400 million EUR by selling excess gold reserves, and even privatizing more state-owned firms and getting rollover debt held by Cypriot investors.
While these options could help though, it’s still a long way from the additional 6 billion EUR that Cypriot has to cough up. Do you think they’ll be able to come up with other ideas before the deadline? Let us know by voting through the poll below!