A Financial Lifesaver Thrown by Creditors Weighs Cyprus Down Angelos Tzortzinis for The New York Times In Cyprus, fears of a bank run led to currency restrictions and a harsh bailout that have sent shock waves through the economy. NICOSIA, Cyprus - Soon after Cyprus was thrown what was supposed to be an economic lifeline in March, Polis Pilakoutas, a 25-year-old Cypriot plumber, had his workweek cut to three days from five. His salary shrank by the same margin. "My boss was very straight," Mr. Pilakoutas said. He explained that he was having a cash problem. By April, the problem had become a crisis as the Cypriot economy went into a nose dive. The plumbing company failed. Mr. Pilakoutas lost his job along with all the other employees, as they became the latest casualties of harsh economic medicine that, across wide swathes of Europe, has often left the patient feeling only sicker. Unemployment in Cyprus, according to figures released this month by Eurostat, the European Union's statistical agency, was 16.3 percent in May, up 16.4 percent from before the March bailout deal between Cyprus and a group of three international lenders. It has gone up further since, economists say, though official numbers are not yet out. The rate for people under 25 is more than 30 percent. Instead of fixing Cyprus's problems, a tough rescue package for the Mediterranean nation has helped turn what began as a banking fiasco into a deep slump across an economy that, according to forecasts by the International Monetary Fund, will shrink by 9 percent this year and 4 percent next year. That is bad enough, but, given the I.M.F."s record of underestimating the pain to be suffered by earlier bailout recipients like Greece, the bleak forecast could prove too optimistic. In a June report, the fund acknowledged that Greece's economic contraction between 2009 and 2012 - around 17 percent instead of the forecast 5.5 percent - "was much greater than anticipated." Sapienta Economics, a consulting group based in Nicosia, believes that Cyprus faces a cumulative economic decline of more than 24 percent this year and next. That would be the most precipitous slump in the European Union since the economies of the now 28-nation bloc began to shudder under the impact of a rolling debt crisis more than three years ago. With an annual economic output of only around $23 billion, Cyprus is of little consequence to Europe's overall economic condition. But it has outsize importance as a testing ground for Europe's response to its seemingly unending crisis. "This is a big experiment, and we are the guinea pigs," said Alexandros Diogenous, the head of a company in Nicosia that imports German cars. The guinea pig is in critical condition. Cyprus's president, Nicos Anastasiades, said much the same thing in a letter sent last month to the so-called troika of creditors behind the bailout deal: the European Central Bank, the European Commission and the I.M.F. The Cypriot economy, he wrote, has been "driven into a deep recession" and will only get worse unless the group of lenders revises some of its terms. "I urge you to review the possibilities in order to determine a viable prospect for Cyprus and its people," Mr. Anastasiades said. In an interview, the president said that Cyprus intended to stick to its side of the bailout deal, which includes deep spending cuts, the overhaul of decrepit state companies and, most controversially, the effective confiscation of billions of euros deposited in Cypriot banks. But, he added, "I am not a magician." When Mr. Anastasiades took office in early March and decided to tackle the problems that his predecessor, a Communist, had largely ignored, he turned to the European Union for help, restarting stalled negotiations for emergency aid to shore up his country's teetering banking sector. After an all-night meeting in Brussels in mid-March, the troika agreed to provide around $13 billion on the condition that Cyprus "bail-in" the banks that had caused so many of the country's troubles and force their creditors and depositors to take heavy losses. An initial proposal to confiscate money from insured deposits under $130,000 was quickly dropped, but the final plan, which shifted the burden to wealthy depositors and imposed tight restrictions on moving money, left much of the banking sector in a catatonic state. It also shattered public trust. We don't trust banks, we don't trust politicians, we don't trust the legal system. We don't trust anybody now," said Christos Nicolaou, the director of a hotel and property company. There is a big question over everything: What might happen next? Mr. Nicolaou said tourism, a pillar of the economy, was down by more than 10 percent compared with the same peak period last year but was still a relative bright spot. A wave of bankruptcies across Cyprus has so far been limited mostly to small companies and shops; bigger enterprises have stayed afloat by slashing wages and staff. But, Mr. Nicolaou said, "we are all on the list." Facing a particularly uncertain future is the financial services industry, a once-booming sector turbocharged by money from the former Soviet Union.