After a chaotic month in which Cyprus was pushed to the brink of default and a possible exit from the euro zone, Cypriots knew things would get bad. But not this bad.
According to a bleak assessment released on Thursday by its European partners, Cyprus will fall into a downward spiral for at least the next two years, with the economy contracting up to 12.5% during the period as the country reduces a banking sector that had ballooned to more than five times its GDP.
And because the economy will do worse than expected, Cyprus must soon raise 13 billion euros ($17 billion) ? nearly twice the amount the government thought it would have to come up with just a month ago ? to keep its debt and deficit from spinning out of control and to meet the terms of a 10-billion euro ($13.1 billion) international bailout secured last month by the newly elected president, Nicos Anastasiades.
A shrinking economy means the country?s budget deficits are likely to grow, so the government will need to raise more money to keep the deficits within limits set under its bailout agreement.
Because the government has also committed to improving the health of its banks, it must come up with more money to ensure that the lenders have adequate capital, particularly critical if their loan losses start to snowball as the economy slumps.
?In the short run, the economic outlook remains challenging,? the European Commission said in the report, which details the conditions that the Cypriot government agreed to meet to obtain the financial lifeline from the so-called troika of the International Monetary Fund, the European Central Bank and the commission.
So hard-pressed is Cyprus that it has agreed to sell its prized assets to raise money. Chief among them is part of the gold reserves held by the central bank. In what would be the first such sale by a central bank in the euro zone, Cyprus had already agreed to sell 400 million euros worth of gold, or an estimated 10 tons from its 13-ton reserve.