The troika delegation will begin meetings with finance ministry officials, the Central Bank and management of commercial banks this week and departs on Saturday. The technocrats are on an “interim mission” to screen developments in the local banking sector. It’s understood they will be looking at steps taken so far to recapitalise the island’s largest lender Bank of Cyprus through a haircut on deposits.

Cyprus has struck a deal with the troika to receive a €10bn bailout after bailing in bank uninsured deposits in a bid to recapitalise the island’s troubled banks. The island’s second largest bank, Laiki, will be wound down and its good part (loans and deposits below €100,000) will be folded in Bank of Cyprus (BoC).

So far 37.5% of uninsured deposits in BoC have been converted to equity, whereas an additional 22.5% remains frozen until the conclusion of an independent valuation of the bank’s balance sheet after absorbing the ‘good’ Laiki. Under the deal with the troika – the memorandum of understanding – an independent valuation of BoC must be completed by the end of June. International lenders have already cleared the first aid tranche consisting of €3bn.

In July, a high-level mission of the troika will again visit Cyprus to monitor overall compliance with the loan deal; if they are satisfied they will be releasing the second tranche. Meanwhile the International Monetary Fund said Friday that substantial risks still loomed for the Cypriot economy even after a multi-billion bailout aimed at averting a debt default.

A new IMF report predicted a deep recession in Cyprus this year and next, and warned of a danger that the downturn could be even more severe unless authorities adhere strictly to conditions imposed as part of the bailout deal. The report served as a stark warning to Cypriot authorities not to slacken strict implementation of the bailout deal's tough terms.

The IMF said the impact of the banking crisis on economic growth is “highly uncertain” and an economic slump could result in a “vicious cycle” of bankruptcies, drops in real estate prices, bank losses, and unemployment. If that happens it «could also lead to a deeper recession than anticipated,” the report said.

The IMF report projected that the Cypriot economy would shrink by 9% this year and another 4% in 2014 with unemployment forecast to peak around 17% in 2014. However, it said there is a risk this contraction could be even deeper.

Source: Cyprus Mail