The IMF program for Cyprus has been released (here and here). Growth is projected to fall 13 percent over the next two years, though the discussion of risks implicitly acknowledges that a larger decline is likely (many private analysts expect a decline of 15 percent this year alone). Given that the program contains 6.6 percent of fiscal consolidation measures during 2013-14, and a major deleveraging of the financial system is underway, skepticism is warranted. The Fund also acknowledges that should these downside risks materialize, or program implementation slip, government debt (which is forecast to peak at 126 percent of GDP in 2015) becomes unsustainable. The programs have buffers, but financing looks inadequate. Coming after a negotiation where the Troika publicly promoted one financing gap (17 billion euros) knowing that the actual gap was far larger (shortly after agreement on the program, the gap was revised to 23 billion euros) further undermines confidence in these projections. The next review, slated for September 15, likely will have to confront these issues.
It now appears that the Cypriot Parliament will reject the government’s amended plan for haircutting deposits. The revised proposal, which reportedly exempted depositors under €20,ooo, satisfies almost no one–Cypriot depositors, the Russians, nor European creditors (including their increasingly agitated banking regulators). The government looks ready to try and renegotiate the bailout, but no creditors have stepped up to fill the hole left by the failure of the tax. There may be pressure on Cyprus for additional fiscal measures, but it’s hard to see that as confidence boosting given the damaging growth effects we have seen in the periphery following aggressive fiscal cutting.