WHILE Cyprus may find ways to rescue its banks affected by the reduction in value of the Greek government bonds they held, it will find it very difficult to rescue itself from going bust, unless it finally cuts spending to eliminate its deficit, experts say.
“In order to avoid resorting to the European Financial Stability Facility (EFSF), you must first balance your budget and this is something I don’t see happening in Cyprus,” academic economist Marios Mavrides said.
As a balanced budget will need measures worth around 1 billion euros, compared to a fiscal consolidation package worth 600 million euros proposed by the government, “the finance ministry must find ways to cut spending by at least further 300 million euros,” Mavrides, who is also lawmaker for DISY, told the Sunday Mail.
As unions and other interest groups object to any idea of additional cuts in their benefits, “it will therefore be hard to avoid resorting to the EFSF”, Mavrides said.
According to Marios Demetriades, a fund manager at the Piraeus Bank in Nicosia, the decision by Standard & Poor’s to cut Cyprus’ sovereign rating one notch to BBB on Thursday demonstrates that the government is unable to convince with its fiscal policy that it can avoid the worst.
“With the rating cut, the government got the message that the budget and the revenue oriented fiscal consolidation measures it proposes are insufficient,” Demetriades said. “Therefore the government must finally turn to cutting expenditure”.
The situation of the public finances may receive a further blow, should the government Cyprus be forced to provide rescue for its banks affected by the reduction of the value of their Greek bonds to half. “The state will have to increase public debt to support banks,” Mavrides added.
This would imply that Cyprus’ public debt may exceed the 67 per cent of gross domestic product target set by the finance ministry for 2012, depending on the amounts in government support banks finally receive.
A preliminary estimate of the European Banking Authority, which ordered banks to strengthen their capital basis, raises capital requirements for European lenders at 106.4 billion euros, while the respective figure for Cypriot banks is 3.6 billion euros. According to EBA’s instructions, lenders have a deadline until the end of June to increase their core tier 1 capital ratio to 9 per cent.
The Central Bank of Cyprus said on Thursday that the actual amount Cypriot lenders will require in order to meet EBA’s standards may be “significantly” lower” and will be determined in November.
According to fund manager Demetriades, banks may need to resort to the government for state aid, if they fail to raise adequate private capital by themselves, while they can even resort to the EFSF.
