Cyprus’ economy is in deep trouble. The first estimate of $23 billion dollars will not be enough and the country is now asking for $7 billion more. The only catch is that Cyprus will need to raise extra capital itself, by selling off its gold reserves.
Will The Cyprus Bail Out Happen
Cyprus needs to raise $7 billion to meet its own contribution to the rescue package and it is looking to sell its gold reserves to do it. It is now known that Cyprus’ original need of $23 billion will not be enough to bailout the country. Officials within the government are saying that the total is now at the $30 billion mark.
A revised assessment of Cyprus’ economy is bleak, to say the least. The country’s economy is expected to shrink by more than 12.5%. What does this mean for the tiny island-country? It will have to raise almost double the amount to keep the deficit and debt from exploding, along with meeting the terms set by an international banking community. Cyprus needs to sell its gold and that is exactly what it’s doing.
Per its own contribution agreements with international donors, the island must sell its gold reserves which are worth over $400 million. In addition to that, there will be higher corporate taxes and a tax on capital gains over a period of three years, which will contribute another $300+ million. Overall, Cyprus needs $30 billion between the second quarter of 2013 and first quarter of 2016, they will need: $14 billion will come from the European rescue fund ESM, $3 billion from the International Monetary Fund and $13 billion from Cyprus itself.
The government in Nicosia had agreed on a plan with its international creditors on the billions in aid. Originally, Cyprus would raise $7 billion in the rescue program. Since the package is reported to take increase, the share capital of Cyprus will almost double. The island now has to sell its gold reserves, pushing the price of the precious metal. Gold posted on Wednesday was at the biggest loss in almost two months – it lost 1.7% of its value and thus closed to a ten-month low. Traders justified the heavy losses with the fear of investors that the debt crisis particularly affected states that could be forced, like Greece or Portugal, to sell their gold reserves.
The country’s credit remains at ‘CCC’. In return for the billions of aid, Cyprus must also reduce its banking sector. Investors are also involved with the bailout, making deposits of more than $100,000 Euros. Cyprus Finance Minister Charis Georgiades criticized the compulsory levy as “an unfortunate decision, not only for Cyprus, which now has to pay the price, but for Europe as a whole.” His country is now in a “shock therapy of enormous dimensions,” which may lead to a deep recession. The country is now being threatened by the possible downgrading of its creditworthiness by the rating agency Standard & Poor’s (S&P).
Is Bankrupcy An Option?
The risk of an imminent state bankruptcy has fallen though. The current credit rating remains at ‘CCC’. However, the view from going to a far “negative” position and being raised to “stable” is bleak. They assume that the Cypriot government will agree to the terms of the bailout, writes S&P. The agreement is necessary in order to obtain loans from the ESM and IMF bailout. It was expected that the aid will be paid before the expiry of Cypriot bonds in June 2013.
However, the economic risks remained high despite the lower risk of national bankruptcy. S&P expects that the Cypriot economy will shrink from 2013 to 2016 by a fifth. According to the EU Commission and the European Central Bank of Cyprus, it may require further funding due to the economic downturn. “The weak economic outlook may also result in additional financing needed to recapitalize the banks,” says the report to the utility for Cyprus. It is also pointed out that the debt of the country is subject to many risks as it seems to dominate the downside risks.
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