Nicosia (AFP) - Debt-ridden Cyprus banks are in for a rough ride next year as a sharp recession stoked by international bailout terms hits consumers and businesses, the central bank governor said Monday.
?As for the prospects of the banking sector in 2014, the sector will suffer further losses due to expected further deterioration in the macroeconomic environment,? Panicos Demetriades told a parliament committee.
?This is down to higher provisions (for bad debt), increased non-performing loans, rising unemployment, falling household incomes, lower company sales and profits,? he said.
Demetriades said high unemployment and commercial bankruptcies will compound an already bad situation with people unable to service their mortgages and bank loans.
But he said bank restructuring and recapitalisation would enable the banking sector to weather the crisis and recover.
And, he predicted the recession-hit economy would contract by less in 2013 than the 8.7 percent forecast by the island's international lenders.
?Nevertheless, the impact of the economy on ordinary people is unprecedented,? Demetriades said.
He was addressing a parliamentary committee examining the government's austerity budget for 2014, which provides for spending cuts of 10 percent to ensure Cyprus meets adjustment targets agreed with international creditors.
Cyprus has already passed its first review by the European Central Bank, the European Commission and the International Monetary Fund, but representatives of the so-called troika are due back in Nicosia within weeks to carry out a second inspection.
In return for a 10 billion-euro bailout ($13 billion), international creditors demanded the winding up of the island's second largest banker Laiki and a haircut on deposits over 100,000 euros in its largest lender Bank of Cyprus.
The unprecedented eurozone "haircut" on deposits forced the government to close all the island's banks for nearly two weeks in March and impose draconian controls when they reopened.
The government is looking to shave 626 million euros off the budget compared to the one for 2013, but it needs to be approved by parliament before the end of the year.
Net expenditure, minus interest payments, is set at 5.59 billion euros compared to 6.22 billion provided for in the 2013 budget.
Finance Minister Haris Georgiades told the committee the budget deficit next year will be 7 percent of GDP ?- comfortably within the 8.2 percent limit set by the troika.
Although budget projections see GDP shrinking by 3.9 percent in 2014, a reduction on this year, Georgiades agreed with the central bank governor that it would be the ?hardest year? for ordinary people as problems created by the crisis, such as youth unemployment, peak.
International lenders do not expect Cyprus, which is suffering from record 17 percent unemployment and a credit squeeze, to exit recession before 2015.
Cypriots have had to endure tough austerity measures, which have seen wages and benefits slashed, while consumer and property taxes have increased.
Cyprus says it fully committed to honouring the bailout terms despite their harshness on bank depositors and the enforced regime of capital controls, unprecedented for the eurozone.
Under the bailout agreement, the government must establish a balanced budget and generate a primary surplus by the end of 2016, when the adjustment programme expires.