FINANCE Minister Kikis Kazamias yesterday urged opposition parties to approve the 2012 budget saying he has no plan B to tackle the effects of a potential rejection.
Kazamias’ plea came a day after ratings agency Standard and Poor’s cut Cyprus’ long-term credit rating by a notch to BBB, citing the banking system’s exposure to sovereign Greek debt and delays in taking further measures to shore up the economy.
The minister said the 2012 had to be approved alongside all additional measures geared towards shoring up public finances.
“I have said (before) and I am repeating it: as finance minister I have no plan B and I cannot imagine of the scenario if the budget is not approved,” Kazamias told state radio. “I am sure parliament will respond and approve budget even with some changes they deem necessary.”
Opposition parties have said that the 2012 budget was optimistic and did not address the problems adequately.
Kazamias rejected the criticism, saying he was not at all overly optimistic and he felt “very comfortable defending this budget,” which aims in cutting the deficit to 2.8 per cent.
Included in the measures are better targeting of social allowances with a view to save some €200 million, a freeze in cost of living allowance payments for the first half of the year and an increase in VAT by two percentage points to 17 per cent.
However, in its reasoning behind the downgrade, S&P expressed doubts that these measures would go through.
“We view the full implementation of these measures as unclear because of opposition from organized labor and other social partners,” S&P said.
The agency said Cyprus has delayed in putting additional measures in place after passing a raft in August.
On August 26, 2011, the Cypriot government adopted and implemented several measures totaling €104 million or 0.6 per cent of GDP in 2011, and €261 million or 1.3 per cent of GDP in 2012 – “short of the €150 million or 0.8 per cent of GDP and €650 million or 3.5 per cent of GDP needed to reach the then deficit targets of 5.5 per cent in 2011 and 2 per cent in 2012,” S&P said.
Since this time, no new measures have been implemented. Additionally, the government has revised its 2011 deficit target to 6.5 per cent of GDP, and 2012 target to 2.8 per cent, the agency said.
While S&P welcomed the €2.5 billion loan from Russia, and the exploitation of natural gas, it said the developments were temporary and did not affect the structural aspects of public finances.
To stabilise its evaluations, Cyprus needed to enact the 2012 budget – currently under discussion in Parliament — and to take additional fiscal consolidation measures.
Additionally Cypriot banks would need to show their ability to cope with the consequences of the Greek crisis without direct state support, S&P said.
“We believe that a Greek default scenario with private sector involvement, or ‘haircuts,’ higher than previously agreed by commercial creditors would necessitate the recapitalization of some domestic banking institutions either through a public offering or a government capital injection,” S&P said.
On Thursday, European Union leaders struck a deal in which banks would take a 50 per cent loss on their holdings of Greek government debt as part of a broad Greek restructuring.
Under that scheme, the Bank of Cyprus (BoC) and Marfin Popular (MPB) – both exposed to Greek debt – would have to raise additional capital of €1.5 billion and €2.1 billion respectively by June 2012.
The European Banking Authority (EBA) said banks have to build up temporary capital buffers against sovereign debt exposures and need to hold a core Tier 1 capital ratio of 9.0 per cent.
Although the Central Bank of Cyprus said the final figures would be lower, both lenders said they are in a position to raise the funds without state assistance.
Kazamias said the debt crisis in the eurozone is a problem plaguing the banking system across the EU.
“The matter must first be tackled by the banks themselves and it is with satisfaction that I heard the biggest banks saying they will exhaust all means at their disposal,” Kazamias said.
In any case, the government has prepared legislation – currently before parliament – to assist its banks if needed.
A financial crisis management would allow the government to bolster a bank’s liquidity if required, and a second bill would create a fund to help stabilise the banking system.
