In a report discussing the Cyprus situation published early on Thursday, Credit Suisse's European Economics Team said "we expect real GDP to decline by more than 20% in the next couple of years, rendering many assumptions of the bail-out obsolete. Cypriot unemployment is likely to rise above 20%."
If the economy in Cyprus tanks to that extent, the assumptions underlying the recapitalization of its banks will be in doubt. The country's banking sector may need another large cash infusion down the line.
If Cyprus had its own currency, the country at least could take measures similar to some of the ones taken by the Federal Reserve in the U.S., on a much smaller scale, to limit economic damage.
After securing the European bailout and the "bail-in" by the large depositors, Cyprus reopened its banks on Thursday, with a limit on withdrawals to 300 euro per day, while allowing people leaving the country only to take up to 3,000 euro in cash, in any currency. The government of Cyprus also announced that "Businesses will be able to carry out transactions up to 5.000 per day, per account and pay staff salaries. Payments and or transfers outside the Republic, via debit and or credit and or prepaid cards are permitted up to 5.000 per month, per person in each credit institution."Those are very strict capital controls, and will no doubt severely curtail economic activity in Cyprus. Just imagine how difficult it will be for some businesses to operate, when they can only make transactions of up to 5,000 euro per day.