Europe sees Cyprus staying in recession until 2015

(NICOSIA) - Bailout candidate Cyprus will sink deep into recession until 2015, the European Commission predicted in its autumn forecast issued on Wednesday.

It sees a rapid deterioration, with the island's economy expected to contract 2.3 percent of GDP in 2012 against a backdrop of "unwinding imbalances and widespread loss of confidence."

"In addition, the tightening of credit conditions has aggravated the unfavourable economic environment while weak confidence has amplified the drag on investment activity," said the report.

The island's economy is expected to shrink by 1.7 percent in 2013 and 0.7 percent in 2014.

The outlook was published a day before a delegation from the troika of international lenders was due in Cyprus to complete bailout term negotiations to prop up a Greek-exposed banking system and recession-hit economy.

"Furthermore, any worsening of the economic situation in Greece remains a significant downside risk for Cyprus as well as any further needs of recapitalisation for the domestic banks," the report said.

The Commission said Cyprus needed to raise enough capital to prevent the "negative loop of lower liquidity, higher indebtedness, worsening labour market conditions, and lower productivity."

Officially, the government predicts the economy will slump by 1.5 percent in 2012, but that is before factoring in austerity measures required by the terms for financial aid.

The budget deficit is expected to remain high above the EU-mandated ceiling of 3 percent of GDP, narrowing to 5.3 percent this year from 6.3 percent in 2011 and then rising again to 5.7 percent in 2013.

Cyprus has been unable to borrow from international markets since last year when credit rating agencies lowered its sovereign rating to junk status.

The government's participation in the recapitalisation of the worst Greek-exposed bank, Cyprus Popular, is expected to increase public debt significantly from 71.1 percent in 2011 to about 90 percent of GDP in 2012.

"In view of shrinking economic activity, the government debt-to-GDP ratio is projected to reach 96.7 percent in 2013 and 102.7 percent in 2014. Fiscal imbalances are set to persist despite the significant consolidation effort pursued in 2012," the report said.

Unemployment is also predicted to sky-rocket after decades of almost full employment, reaching 13.9 percent in 2014 from 13.1 percent in 2013 and 12.1 percent in 2012.

Brussels does expect revenues from the key tourism industry to flourish, however, reflected by arrivals from Russia which are up by 50 percent this year.

Country forecast for Cyprus