(Reuters) - Cyprus has to sell excess gold reserves to raise around 400 million euros ($523 million) to help finance its part of its bailout, an assessment of Cypriot financing needs prepared by the European Commission showed.
Cyprus, one of the euro zone’s smallest economies, has been forced to wind down one of its largest banks and slap losses on uninsured deposits in order to qualify for a 10-billion-euro lifeline from the European Union and the International Monetary Fund.
Gold prices fell around 1 percent on the day in the immediate reaction to the draft assessment, heading towards last week’s lowest level since May 2012, after the draft assessment set out plans for the sale of some 10 metric tons, the biggest euro zone bullion sale in four years.
The assessment, obtained by Reuters on Wednesday, also said that Cyprus would raise 10.6 billion euros from the winding down of Laiki Bank and the losses imposed on junior bondholders and the deposit-for-equity swap for uninsured deposits in the Bank of Cyprus.
Nicosia would get a further 600 million euros over three years from higher corporate income taxes and a rise in the capital gains tax rate.
Of the total Cypriot financing needs of 23 billion euros between the second quarter of 2013 and the first quarter of 2016, the euro zone bailout fund will provide 9 billion euros, the International Monetary Fund 1 billion euros and Cyprus itself will generate 13 billion euros, the assessment said.
Cyprus’s total bullion reserves stood at 13.9 metric tons at the end of February, according to data from the World Gold Council.
The analysis from the EU and IMF predicts the Cypriot economy will contract by 8.7 percent this year, following the bailout designed to put Cyprus back on a stable financial footing.
It also shows that the economy will go on contracting through 2014, returning to marginal growth of 1.1 percent in 2015. At the same time, debt as a proportion of gross domestic product (GDP) will peak at 126 percent, before falling to 104 percent in 2020, the debt sustainability report shows.
The analysis forecasts the budget deficit to be 6 percent of GDP this year, 7.9 percent next year, 5.7 percent in 2015 and 2.5 percent in 2016.
The European Stability Mechanism (ESM), the euro zone bailout fund, also said in a proposal that the maximum average maturity of euro zone bailout loans to Cyprus will be 15 years and the longest maturity will be 20 years.
Cyprus will be charged a 10-basis-point margin above financing costs for the loans, plus a 50 basis point up-front fee for every disbursement, said the proposal, which will be discussed on Friday by finance ministers of European Union countries at a meeting in Dublin.
The ESM document, obtained by Reuters, bears the date of April 23, 2013, indicating that this will be the date when the euro zone is likely to formally sign the bailout agreement with Cyprus.
($1 = 0.7642 euros)
Reporting By Gernot Heller; Writing by Jan Strupczewski and Justyna Pawlak; Editing by Michael Roddy