The European Commission confirmed its economic outlook for cash-starved Cyprus, doubling its contraction estimate from its previous autumn forecast from 1.7% to 3.5% for the whole of 2013.
"Risks remain important and tilted to the downside," the Commission said, prompting the Finance Ministry in Nicosia to issue a statement whereby the forecast is the same as the one included in the bailout agreement to be signed with Troika of international lenders – EC, the European Central bank and the IMF.
Cyprus applied for financial assistance from the European Stability Mechanism last June, seeking up to 17.5 bln euros, nearly half of which will be used to recapitalise the local banks that have a heavy exposure to Greek government bonds that underwent a massive haircut.
The bailout plan for Cyprus is expected to be agreed on Eurogroup level in March, after the presidential elections on Sunday.
Conclusion of an adjustment programme would be of "paramount importance" in stabilising Cyprus's economy, the Commission added.
"A contraction of 3.5% this year is in line with the government and troika forecasts so it is not unexpected", said Fiona Mullen, Director of Sapienta Economics consultancy.
"If the new government can sign a bailout quickly, I actually believe that the worst will be behind us. The rally damaging impact on the economy has been the uncertainty which we have been living with since the Greek haircut."
The Commission winter forecast said that the Cyprus economy was expected to contract by a further 1.3% in 2014.
Bailout talks have dragged on, complicated by debt sustainability concerns, German misgivings about the island's commitment to financial transparency and delayed by a presidential election that has focused on the economic failures of the outgoing communist government.
Out of pocket and shut out of markets since mid-2011, Cyprus has been increasingly relying on short-term expensive borrowing from domestic institutions until aid is released.
Nicos Anastasiades, a pro-bailout candidate who is the favourite to win Sunday's elections, told Reuters in an interview on Thursday he had "sounded out" institutions, including governments, to give Cyprus a bridging loan before the conclusion of a bailout deal.
Much needed fiscal measures introduced by Cyprus in anticipation of a bailout, record-high unemployment and financial sector deleveraging would be affecting output, the Commission said. In addition, uncertainty was a drag on business and consumer confidence.
"The conclusion of a macro-economic adjustment programme would be of paramount importance in stabilising the economy, but risks would remain on both the external environment and the domestic front," it said.
Unemployment was set to worsen further in coming years to 13.7% in 2013, and to 14.2% in 2014.
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