Fallout from fiscal bailout intensifies for hard-pressed Cypriots

ATHENS — After a chaotic month in which Cyprus was pushed to the brink of default and a possible exit from the eurozone, Cypriots knew things would get bad. But not this bad.

According to an assessment released Thursday by its European partners, the Cypriot economy will fall into a downward spiral for at least the next two years, contracting by up to 12.5 percent over the period as the country cuts back an outsize banking sector that had ballooned to more than five times gross domestic product.

Shrinking growth means the country’s budget deficits are likely to grow, so it will need to raise more money to keep them in line with the terms for its $13.1 billion international bailout, secured last month. Because the government has also committed to improving the health of its banks, it must also generate further funds to ensure that those institutions have adequate capital.


“In the short-run, the economic outlook remains challenging,’’ the European Commission said in the report, which details the conditions that the Cypriot government agreed to in order to obtain the financial lifeline.

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So strapped is Cyprus that it has agreed to sell some of the family jewels to raise money. Chief among them are excess gold reserves held by the central bank. In what would be the first such sale by a central bank in the eurozone, Cyprus had already agreed to sell 400 million euros worth of gold — an estimated 10 tons from its 13-ton stash.

What is more, a hornet’s nest of geopolitical tension could be agitated as Cyprus agrees with its international creditors to accelerate the exploration of major undeveloped natural gas fields within its waters. The hope, as stated in the commission’s assessment, is that the proceeds would be used to keep Cyprus’ debt under control as the economy slumps.

But Turkey, which occupies the north of Cyprus, last month already challenged any move by the island nation to speed exploration. Turkey warned it may ‘‘act against such initiatives if necessary.’’