CYPRUS needs an effective fiscal consolidation plan to regain trust of the markets, but failure to do so will trigger an “exceptionally unpleasant” downward spiral, Central Bank governor Athanasios Orphanides said yesterday.
Orphanides said delays in addressing economic problems would ultimately lead to painful cutbacks and steep taxes, impacting Cyprus’ role as an international finance centre.
“It is the obligation of all to support an adequate fiscal consolidation package,” Orphanides said.
“If we also fail this time to apply a credible package of measures, Cyprus will be in an exceptionally unpleasant situation with profound economic and social implications for our future and that of our children.”
Cyprus’ €17 billion economy has staggered from the exposure of its banks to debt-crippled Greece and stunted growth exacerbated by a munitions blast which destroyed the island’s largest power station in July.
Orphanides said fiscal tightening adopted this year was insufficient because it had been too late. Authorities trimmed public sector salaries in August and say they will cut back on student and child grants.
However, unions have rejected further finance ministry proposals for a two-year freeze on pay increments. Government attempts to raise VAT to 17 per cent from 15 have also been pending for some time.
Orphanides said government and parliament had to act in concert to convince unions to get on board because Cyprus “was at the edge of the precipice”.
“The price we will pay tomorrow will be incomparably larger than what we are called to pay today,” he said.
The governor called upon the government and the unions to realise that at the moment “there is no potential for further delays in taking measures with the pretext of consensus”.
“The problem of sharing the burden, which concerns us today, pales in comparison with the unbearable burden we’d be asked to pay tomorrow – all of us, without exception – if we delay,” Orphanides said.
Ratings agencies have downgraded Cyprus repeatedly in the past year on worries at the exposure of its banking system to Greece, and fiscal slippage.
Cyprus international borrowing costs have shot up. The yield on a 10-year benchmark was 10.80 per cent on Friday. The island has been shut out of international capital markets and recently signed a €2.5 billion euro loan from Russia.
Meanwhile, it was announced yesterday that President Demetris Christofias will be meeting main opposition DISY chief Nicos Anastassiades to discuss the economy.
The announcement follows a request by Anastassiades on Friday.
DISY has consistently criticised the government of inaction and diffidence on the economy, a charge rejected by the administration, which counters that the opposition party bore much of the blame for current problems due to its actions when it was in power between 1993 and 2003.
EU Economic Affairs Commissioner Olli Rehn said earlier in the week that Cyprus needed to take comprehensive measures by mid December if it were to avoid EU fines for violating fiscal rules.
Monday’s meeting between Christofias and Anastassiades will be attended by Finance Minister Kikis Kazamias and DISY deputy chairman Averof Neophytou.
