CYPRUS received yet another sovereign ratings cut yesterday and thanks to the fiscal policy of the Christofias government, more downgrades are not out of the question any time soon.
For some reason, whatever the government plans, announces, or even negotiates, it does not seem to convince rating agencies, investors and our creditors that Cyprus really means business when it comes to fiscal policy, to responsibly manage the taxpayer’s money.
Finance Minister Kikis Kazamias said yesterday that Cyprus’s fiscal deficit for 2011 will be around 6.5 per cent of gross domestic product compared to an initial target of below 4 per cent. The widening of the deficit, he said, was caused by the situation created by the July 11 explosion at Mari.
This excuse does sound plausible and would provide for a good explanation if we were to ignore what preceded the explosion, for instance that the fiscal deficit for the first half of this year was already 3.5 per cent, which gives a good indication that we should expect a deficit of at least 7.0 per cent until the end of the year, if not more since civil servants are also paid their 13th salaries in December.
Taking into account the current European debt crisis, Cyprus’s rising borrowing costs, the background that led to Kazamias’s appointment as Finance Minister and his record as a politician, it is sad to see him fail so soon in rising to the occasion.
Apparently Kazamias did not regard soothing the markets as a priority. It seems he didn’t get the message that funding more debt is becoming prohibitively expensive and the only way to get around this is simply making less debt.
His predecessor Charilaos Stavrakis repeatedly told our creditors this year that we were expecting to have a fiscal deficit of less than 4.0 per cent this year, 2.0 per cent next year and a balanced budget next year.
Their willingness to lend to us again will depend on our ability to do what it takes to avoid a complete fiscal derailment as expenditure soared more than 9.0 per cent in the first half of the year and revenues stagnated.
It shouldn’t also escape Kazamias’s attention that our creditors are organisations managing billions of euros and employing experts who can easily assess how good he does his job. They expect no hesitance, but decisiveness. They want to see our economy grow as it is the best guarantee for them they will get their money back, and not being run by a trade union cartel.
The government was in denial and ignored warnings ahead of the Mari explosion. It is still in denial now, even as successive rating cuts show us clearly what is about to come.
