European Commission Forecasts the Doom Cyprus Faces

May 5, 2013 • 9:57AM

May 5, 2013 (LPAC)—After forcing the country to accept its "bailout" and memorandum, the European Commission now forecasts catastrophe for the Cyprus economy. It's as if a doctor, after treating you for an illness, begins to describe how his treatment will kill you.

The EC spring forecast, published May 3, said the economy is expected to contract by 8.7% this year and 3.9% in 2014 mainly as a direct result of the bailout. These are very conservative figures and will no doubt prove as wrong as all of the Commission's forecasts. The collapse will be caused "by the immediate restructuring of the banking sector, which affects net credit growth, fiscal consolidation, and the high degree of economic uncertainty which weighs on domestic demand and investment." The capital controls imposed to prevent a run on the banks, after the EC-ECB-IMF Troika seized a portion of uninsured bank deposits to bail-in the banks, "are expected to hamper international capital flows and to reduce business volumes in both domestic and internationally oriented companies.... The bail-in of uninsured depositors implies a loss of wealth, which will also affect private consumption and investment." This will only get worse as the banks "de-leverage."

"Little reprieve could be expected from exports (tourism being most promising) amid uncertain external conditions and a shrinking financial services sector." While forecasting unemployment in 2013 would reach 15.5% and 16.9% in 2014, it admits that the situation will get worse as a result of the implementation of the "macro-adjustment program."

"Also, risks of household and corporate defaults propagating through the economy may lead to further losses in the banking sector and increased unemployment. Upside risks relate to potential investment activity in the energy sector." All of which will lead to less government revenue as the economy continues to collapse.

"The decline in economic activity is expected to lead to worse revenues in 2013 than in 2012 and to a faster worsening in 2014, as these taxes are collected in the following year," the EC said. "Indirect tax receipts are also expected to fall in both 2013 and 2014 in line with the reduction of domestic consumption and despite the increases on the VAT (value-added tax) rates and on excise duties."