AFTER cutting Cyprus’ sovereign rating on Tuesday, Moody’s, as was expected, yesterday downgraded the ratings of Cyprus’ banks. It was the second international ratings agency to cut Cyprus to junk, after Standard and Poor’s, both also agreeing that the outlook was negative. Once the third agency follows suit – Fitch’s rating of Cyprus is one notch above junk – which is inevitable, the government will have nowhere to borrow money from, not even ‘friendly’ governments of other states.
Finance Minister Kikis Kazamias described the latest downgrade as ‘unjustified’ and ‘unfair’. He also introduced a note of defiance, saying that ‘we should prove practically to those who judge us that they are wrong.’ How he would prove this he did not say and we doubt he has any idea either, but he had to say something. Former president George Vassiliou also said the downgrade was unfair, but understood why the decision had been taken. The agency had no confidence in the government tackling the serious structural problems and placing the economy on a healthy footing said Vassiliou.
And it was perfectly justified in reaching this conclusion. The Christofias government has proved beyond reasonable doubt that it does not have the will to tackle the structural problems, taking a few half-baked measures grudgingly, when it was too late. Worse still, measures – the suspension of CoLA and small cut in public sector wages – were temporary and after two years will return to put an added strain on public finances. The agency was not unfair in highlighting the problems that would arise over the next two or three years, as Kazamias claimed, because the government has not done enough to ensure the long term health of the economy.
Of course the exposure of Cyprus’ banks should take a big share of blame for the downgrades, but this does not absolve the government of responsibility, as Christofias’ spokesmen have been implying. It is not just because of the banks that the Cyprus government cannot borrow money in the international markets, but because it has been unwilling reduce the public pay-roll adequately, it has adopted patch-up solutions for the state pension fund and it has not abolished CoLA. In fact some of the spending cuts for this year were imposed on the initiative of two deputies at the House Finance Committee, because the government continues to be in denial about the economic problems facing the country.
We know that rating agencies have no business interfering in the affairs of countries, but there is no denying that the repeated downgrades are a show of no confidence in the Christofias’ government’s ability to manage the Cyprus economy. Everyone sees this except Christofias and his entourage.
