Troika begins 3rd review of bailed-out Cyprus economy

(NICOSIA) - International lenders on Wednesday began their third assessment of the Cyprus economy to see if Nicosia is upholding its obligations under a bailout accord struck last March.

Cyprus has successfully completed two similar reviews by the so-called troika of lenders.

The latest examination will run two weeks and focus on bank restructuring, the planned privatisation of state assets and how to deal with non-performing loans.

The central bank said troika technocrats, who will be on the island until February 12, started their mission with "general discussions" on the financial sector.

They will also meet in coming days with officials from the major banks and the cooperative banking movement, which is undergoing a 1.5 billion euro ($2 billion) restructuring process.

In previous reviews, Cyprus has been praised for sticking to the harsh bailout adjustment programme it agreed last year with the European Commission, European Central Bank and International Monetary Fund.

Nicosia has said it will stick to the bailout agenda no matter how unpopular it is, but the troika will also look at revenue raising measures and how effective they have been.

Cypriots have had to endure tough austerity measures which have seen wages slashed in the private and public sectors, while consumer taxes have also increased such as VAT.

In return for 10 billion euros in aid from international lenders, the small EU member state agreed to wind down its second largest bank, Laiki, and impose losses on depositors in under-capitalised largest lender, Bank of Cyprus.

Depositors in Bank of Cyprus were hit with a 47.5 percent bail-in as part of the package.

Recession-hit Cyprus needs to pass this assessment to receive its next tranche of bailout cash. It has already received nearly half the ten billion agreed last year.

Cyprus Central Bank chief Panicos Demetriades said on Monday that the biggest challenge facing the troubled banking sector was clawing back bad debt.

The IMF estimates that non-performing loans of 19 billion euros represent 120 percent of the island's GDP and around 46 percent of all loans.

International lenders do not expect Cyprus -- suffering record 17 percent unemployment and a credit squeeze -- to exit recession until 2015.

A survey released Wednesday by the University of Cyprus estimated the economy contracted 5.5 percent in 2013 -- lower than the troika's forecast of 7.7 percent -- and that it will continue to shrink by 5.4 percent in 2014.