CYPRUS’ hopes for a cheap loan from Russia may do more harm than good as it may serve as a counter incentive for trade unions to accept badly needed cuts in their wages, economists have said.
After rumours leaked to the press that Cyprus is close to striking a deal with the Russian government for a five-year €2.5 billion loan to finance its budget deficit and refinance its maturing debt at an annual interest rate of 4.5 per cent, trade unions started to strengthen their resistance, Alexandros Apostolides, who teaches economics at the European University of Nicosia said. These reports were not denied by the finance ministry.
“This is extremely dangerous and may have not been accidental after all,” Apostolides told the Sunday Mail. “It may have blown up the fiscal consolidation efforts”.
While a cheap loan may provide relief amid rising borrowing costs, it does not solve a debt crisis, according to Apostolides.
Finance minister Kikis Kazamias, who wants to slash budget deficit to 5.5 per cent of gross domestic product this year and 2 per cent in 2012, must achieve further budget cuts of 0.2 per cent of GDP this year and further 2.2 per cent next year, according to a Standard & Poor’s report published on Monday. Otherwise, Cyprus faces further cuts in its sovereign credit rating, S&P said.
While Kazamias reiterated on Friday that a possible deal for a cheap loan would not affect the government’s fiscal consolidation efforts, civil servants’ union PASYDY, in unison with the unions of teachers and doctors, rejected any notion of having their 13th salary cut by 25 per cent and their compensation for inflation frozen for a two year period. OHO-SEK, the union of employees at semi-governmental companies also threatened strike action.
“It sends the message that we are not on the verge yet and that there are still available sources of financing in addition to the money markets,” economist Symeon Matsis said in reference to the reports about the Russian loan deal and the recent increase in borrowing costs. “It makes it difficult for some groups to accept cuts in their salaries and terms of employment”.
What Cyprus needs now to consolidate its public finances is cutting the payroll of the wider public sector, i.e. central government, municipalities and state non-profit organisations, according to Matsis. “Wages make up 46 per cent of the budget,” he said.
Cyprus saw the yields of its five-year and ten-year bonds remaining above 15 per cent and 12 per cent respectively in recent weeks, after it was downgraded by Moody’s, Standard & Poor’s and Fitch following the Mari explosion and the government’s delay in presenting a credible fiscal consolidation package.
Apostolides expressed also concern about the information that the loan which would be granted below market rate, would come directly from the Russian government, which minister Kazamias neither denied nor confirmed.
“I wonder what the trade-off could be,” Apostolides said. “We may end up like Faust who sold his soul to live another day and end up as Russia’s pawn in the European Union”.
