NEW AUSTERITY measures will be announced within days, the government said yesterday only hours after Brussels threatened Cyprus with immediate sanctions if measures were not put in place to lower the deficit.
Cyprus, along with Malta, Belgium, Hungary and Poland have failed to reign in their deficits to the required level of under 3.0 per cent and will be receiving stern warning letters from Brussels in the coming days, said EU Economic and Monetary Affairs Commissioner Olli Rehn.
“I have already given an early warning to the ministers of these countries during the last Ecofin Council (held on Tuesday) and will be sending letters with our requests to these specific member states,” Rehn said.
Last month Rehn highlighted Cyprus and Belgium “As examples of those which could be at risk (of EU sanctions) if they do not make significant adjustments to their public finances within the next couple of months.”
Rehn was speaking yesterday after the release of the EU’s autumn forecasts, which said Cyprus’ deficit in 2011 will reach 6.7 per cent, while growth will be marginally above zero at 0.3 per cent.
Without any measures, the EU said, the deficit in 2012 will drop to 4.9 per cent, with flat growth. The deficit in 2013 is expected to remain at similar levels – 4.7 per cent, the EU said.
Growth will reach 1.8 per cent.
“Economic activity is projected to stagnate in 2012 and to recover moderately only in 2013,” said the forecast report. “During this period, domestic demand is set to remain weak. The deterioration in financial markets and the tightening of credit conditions should sustain the cost of and limit the access of the private sector to financing.”
The EU said their 2012 deficit forecast incorporates a more prudent assessment of revenue prospects “given a less tax-rich growth composition, and possible overruns on the expenditure side, especially of current primary expenditure in view of past trends on key items such as the wage bill and social transfers.”
Moreover, measures that are still under discussion with an uncertain outcome or with no information on the modalities of their implementation, (such as the increase in VAT from 15 to 17 per cent and better targeting of social allowances) are not taken into account, the EU said.
“Based on the no-policy-change assumption, the deficit is set to subside marginally to 4.7 per cent of GDP in 2013, due to savings on the public wage bill from the abolition of public sector posts and the adopted measure of one new recruit for every four retirees in the broader public sector. With weak growth and an increasing deficit, the debt-to-GDP ratio should remain on a rising trend and reach almost 71 per cent of GDP by 2013,” the EU said.
In Nicosia, Finance Minister Kikis Kazamias said new measures are currently being processed and will be announced within days.
“When we are ready, and it is a matter of a few days, we will make the announcement,” Kazamias said after meeting President Demetris Christofias.
The minister declined to go into detail but he did say that taxing wealth and luxury is included in the measures being processed, as were provisions concerning the state sector.
In the past year, Cyprus has been repeatedly downgraded by ratings agencies over the state of its economy and its banks’ exposure to Greek debt.
The latest downgrade came from Moody’s last week, which cut the island’s credit rating by two notches to Baa3, one level above junk, forecasting the government would have to bail out its banks next year due to their exposure to Greek debt.
As the government has lost access to international capital markets, it would probably need to seek emergency funding from official sources, the ratings agency said.
Kazamias yesterday hit back at ratings agencies, saying they were part of the problem.
He said making a forecast that has no substantive basis and sending the message to the markets, they created concern among investors.
“The degree of concern rises and later they essentially try to fulfil their own prophesy,” Kazamias said. “This way is unacceptable. That’s why I say that some ratings agencies are part of the problem the way they act.”
