THE GOVERNMENT may find it hard to convince foreign investors and credit rating agencies of the effectiveness of its fiscal consolidation efforts, as borrowing costs rise and the danger of having to resort to the European rescue mechanism looms, economists warned yesterday.
Despite the austerity package unveiled on Friday by government spokesman Stefanos Stefanou providing for stricter measures – such as cutting pay scales for newcomers in the public service – than similar packages announced in the past, it might still be too little too late, economist Spyros Episkopou said.
“These measures may have an impact provided they are implemented immediately,” Episkopou, the CEO of Epicentral Consultancy Ltd. told the Sunday Mail.
The measures aim at increasing revenues, containing public expenditure, which rose 12 per cent year-on-year in the first five months to €2.9 billion, reforming the state pensions system and limiting welfare benefits to those in real need.
The package was the outcome of a meeting of the government coalition partners on Friday, two days after the government saw the cost of borrowing skyrocket while a further rating cut by both Moody’s Investors Service and Standard & Poor’s Ratings expected this month.
Cyprus has already been downgraded by all three credit rating agencies on its banking sector’s exposure to Greece, and delays in tackling structural reforms.
The government sold €714.6 million in two-year-bonds on Wednesday at an average yield of 5 per cent. On the same day, Germany’s government sold comparable securities at an average yield of 1.54 per cent.
“It is worrying to watch the simultaneous increase of the interest rates for public debt while the tapping of funds from international markets is slowing down,” Episkopou said. “Lending to the public sector is now carried out on domestic terms while foreign institutional and private investors no longer seem to be buying Cypriot bonds”.
The increase in borrowing costs for the government reflect an aversion for Cypriot securities by foreign investors who have doubts over the government’s resolve to tackle challenges faced by the economy such as “the pending pension reforms, the exponential increase of the public sector wage bill and the inelastic downward nature of the public expenditure,” Episkopou said.
The government must demonstrate that it does not intend to limit its efforts to the measures it announced on Friday which are a step in the right direction, economist Symeon Matsis said.
As investors and rating agencies have doubts on whether the government is capable of cutting fiscal deficit, “it must now demonstrate its willingness to take more radical measures,” Matsis added.
Given the government’s previous fiscal consolidation record, the government’s borrowing costs remain comparably low, according to Episkopou. This is because Cypriot buyers, in contrast to those abroad, continue to show faith in Cypriot bonds.
“For the moment, it is just Cypriots, both individual and institutional investors, who still feel confident about the Cypriot government securities. This is attributed to the lack of awareness about, as well as unwillingness to investigate in detail, alternative investment opportunities,” Episkopou said.
Another explanation, he said, may be the belief “that the European Union will provide financial support to Cyprus should it fail”.
The government proposals include cutting the number of staff in the broad public sector by 5,000, reducing overtime pay by an additional five per cent this year and 20 per cent in 2012.
Three semi-government organisations, the olive, potato and milk marketing boards, will be abolished and there would also be changes to the way civil service pension payments are calculated, and a contribution made by staff in the broader public sector.
There would also be a scaled levy paid by registered companies and adjustments to taxation on real estate.
Businesses yesterday welcomed the measures but they too highlighted the need to move fast.
“It is the most serious effort to tackle the structural distortions of the Cypriot economy and to achieve the important objective of convincing the ratings agencies to stop the successive downgrades because, honestly, we cannot take any more,” said Manthos Mavromatis, chairman of the chamber of commerce and industry (KEVE).
He said the declarations should be turned into actions and pass through parliament before the end of July, at least the changes to the pensions system.
“And there is one condition: if the effort is to pass the measures to raise revenues first and leave the expenditure cuts for later, we state from now that we are against,” Mavromatis said.
Employers and industrialists OEV echoed KEVE. “We need to act immediately for the benefit of the Cypriot economy, which is the island’s main support on all levels,” OEV deputy chairman Andreas Pittas said.
