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Cyprus bailout swells to €23bn

Brussels - The cost of bailing out Cyprus has swollen to €23bn, with the crisis-hit country having to take on the lion's share of the measures needed to avoid bankruptcy, according to a draft document by the country's international creditors.

The draft document, obtained by The Associated Press on Thursday, says the country will have to find €13bn - an increase on the €7bn contribution agreed during the country's chaotic bailout talks last month. The money will be raised by imposing heavy losses on large bank deposits, levying additional taxes, privatisations and a part-sale of the central bank's gold reserves.

"The sheer size of the increase has underlined the extent of the enormous challenges facing Cyprus itself," Jonathan Loynes of Capital Economics said in an analyst note.

The so-called troika of international creditors  the European Commission, the European Central Bank and the International Monetary Fund  are set to grant the Mediterranean island nation €10bn in rescue loans to recapitalise its shaky banking system and keep the government afloat. For its side of the deal, Cyprus was supposed to contribute €7bn to the rescue.

In the latest draft document, however, the troika has revised the overall cost of bailing out Cyprus amid a gloomier economic outlook for the country, adding an extra €6bn to the bill.

The Cypriot government blamed the gulf between the original total and the new €23bn bill on the previous leftwing administration and the time it took to properly negotiate a bailout - delays which pushed the cost of recapitalising its banks much higher.

Government spokesperson Christos Stylianides accused former President Dimitris Christofias of failing to "take responsibility and complete indecisiveness" in promptly negotiating a bailout.

As part of the original deal, Cyprus agreed to raise the €7bn mostly by overhauling its bloated banking industry and tax increases. This would involve breaking up its second-largest bank, Laiki, and imposing losses on savers who have more than €100 000 there and in another lender, the Bank of Cyprus.

The draft creditor document now shows that the troika now expects the break-up of Laiki to raise €10.6bn, which will be used to prop up the Bank of Cyprus.

The document also says Cyprus will have to sell off parts of its gold reserves - raising another €400m in the process - a first for a bailed-out European country.

However, Cyprus Central Bank spokesperson Aliki Stylianou said that the Central Bank Governing Board "is not considering any such gold sale at this time."

Meanwhile, the Cyprus government moved late Thursday to further loosen restrictions on access to accounts that were imposed last month to forestall a withdrawal rush by fearful savers. The "capital controls" - the first that any country has applied in the eurozone's 14-year history - were put in place when banks reopened March 28th after remaining shut for nearly two weeks until a bailout agreement was finalised.

A new decree that will remain in place for seven days lifts all restrictions on transactions under €300 000 to re-energise cash-starved domestic businesses which had difficulty paying suppliers and employees. Moreover, the daily limit on transactions outside of Cyprus not requiring prior approval is raised from €5 000 to €20 000.

However, a daily cash withdrawal limit of €300 remains in place, as well as a ban on cashing checks. The decree also introduced a new restriction on opening new accounts in banks where customers had never done business before.

Eurozone finance ministers meet

The eurozone's 17 finance ministers are gathering on Friday at a meeting in Dublin where, they are expected to discuss a raft of documents spelling out the details of the assistance package for Cyprus.

The measures in the draft document highlight how Europe's financially more stable creditor countries are becoming increasingly impatient with bailing out their southern neighbors and are inflicting harsher terms on those in need of assistance. Cyprus is the fifth eurozone country to receive bailout loans after Greece, Ireland, Portugal and Spain.

The troika is seeking to keep its contribution at €10bn, putting the onus for finding the missing funds on Nicosia. However, there are concerns among analysts that the hit to Cyprus's economy from the terms of the bail-out deal may be too much for the country to bear.

Cyprus is expected to gain €1.4bn from privatisations over the next few years. However, similar demands on Greece, which has received €240bn in bailout loans so far, had to be revised downward several times as selling state assets in the midst of a recession has proven tricky.

The creditors' underlying growth assumptions for Cyprus are also raising concerns: If the reality will be worse than the forecast, another bailout or additional revenue-raising measures might be necessary to plug the resulting shortfall.

Cyprus's tiny annual economic output of about €18bn - or less than 0.2% of the eurozone total - is expected to plunge by 8.7% this year, and another 3.9% in 2014, according to another official document by the creditors.

Several analysts, however, have cautioned that Cyprus' economy might shrink by more than 10% this year alone in the wake of the harsh banking restructuring and the other measures required to qualify for the eurozone bailout.

"If everything goes according to plan, the growth figures might at least be in a realistic range, if too optimistic," said Christoph Weil of Germany's Commerzbank. "If there are any problems - and there are significant downside risks - then it could be much worse, and a combined contraction of 20% is within the range of the possible," he said.

In 2015, the country is forecast to return to growth of 1.1%. Such a relatively quick turnaround might prove quite optimistic if Greece is any guideline - the country is in its sixth year of a protracted recession and sees unemployment hovering at around 27%.

"I don't think this is realistic. The country must go through a painful and wide-ranging restructuring of its economy, with half of its banking sector evaporating, I think it will take at least three years for the economy to bottom out," said Weil.

Other analysts, however, were more upbeat.

"The downward trend in Cyprus won't be as protracted as in Greece," said economist Ulrich Kater of Germany's DekaBank.

"To begin with, Cyprus has a much higher per-capita income than Greece. Secondly, it also has the benefit of being a small, homogenous economy with a more efficient administration, meaning it will be easier for the government to turn things around," he added.

Far on the horizon, Cyprus also plans to gather new revenues from exploiting significant offshore natural gas finds, but any proceeds may well be a decade away and are fraught with uncertainty given rival claims by Turkey and negotiations with Israel over some of the gas deposits.

The rescue loans will further increase Cyprus' debt burden, which is set to peak at 126% of GDP in 2015, according to the documents. That would be one of Europe's highest debt burdens, putting a serious question mark on the feasibility of returning to the markets to refinance its debt in the following years.

Capital Economics' Loynes said the economic projections contain "a considerable degree of optimism" given the uncertainties of unwinding the banking sector and tightening the government's budget.

"This could force Cyprus to undertake further fiscal tightening to meet its borrowing targets and casting doubt over the sustainability of the bail-out," he said.



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