The “bail-in deal” agreed by Cyprus and its international creditors will likely hit the country’s tax revenues, leading to further austerity measures in the Mediterranean Island, IHS Global Insight Analyst Sean Harrison said.
The job losses from liquidating Laiki bank and the contraction of economic activity across the country due to negative credit growth will be felt fairly quickly, the economist said.
The deal is likely to hit tax revenues, possibly leading to further austerity measures to the ones agreed in the 2013 budget in November 2012, which set out cuts of EUR 480 million, roughly 2.75 percent of GDP, Harrison pointed out.
The current capital controls will most likely be lifted gradually in an attempt to prevent massive capital flight, the economist said. Once restrictions on capital flows are fully lifted, IHS Global Insight expects a gradual outflow of deposits due to administrative restrictions that apply EU wide.
Harrison said signs of a cash economy have begun to emerge and may increase in scope in the coming weeks as more suppliers are demanding cash payment upfront due to being cut off from credit.
Under the rescue deal, Laiki will be shut down and split into ‘good bank’ and ‘bad bank’. The ‘good bank’ will be folded into the Bank of Cyprus and the ‘bad bank’ will be run down over time.
by RTT Staff Writer
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