ANOTHER international ratings agency downgraded Cyprus’ rating by two notches on Thursday. Moody’s was the second agency to do so in the last three months, Standard and Poor’s having cut Cyprus’ rating to A in November. A third, Fitch, meanwhile, has announced that it had placed the economy’s AA rating on review for a downgrade.
Moody’s announcement was widely expected given the government’s abject failure to undertake the structural reforms that would put state finances on a healthier basis. The other concern of the rating agencies, about which the government can do nothing, is the exposure of the Cypriot banks in Greece. If problems from the banking sector’s Greek exposure were to increase, another downgrade could be expected said Moody’s.
While the government could do nothing about the banks’ possible problems it could have prevented the downgrades if it had the courage to undertake the structural reforms that every sensible person in this country has been calling for, for more than a year. Instead, it has initiated stop-gap measures of no long-term value, while fatalistically awaiting the downgrades, which are very damaging to the economy.
Moody’s report made it quite clear that the agency was not convinced by the measures taken so far. The government’s fiscal measures were inadequate and “these improvements are likely to be short-lived,” it said. Failure to undertake structural reforms of public sector wages and social transfers, which amounted to two thirds of state spending, meant that “longer-term deficit and debt reduction will be very difficult to achieve,” the agency concluded.
If the government sincerely believed that the half-baked, half-hearted measures it has taken would put state finances back on a healthy basis, then our economy is in even bigger trouble than we think. The spokesman’s reaction to the downgrade suggested that the government believed it had done enough. He said the government “has presented a comprehensive package to address problems from the global economic crisis and to address structural problems of the economy.”
This response would only be part of a cynical communications game the government is playing in order to fool people into thinking that it has everything under control, when nothing could be further from the truth. The communications game featured another two publicity stunts in the last couple of days, aimed at deflecting attention away from the downgrade. A day before the Moody’s report it was announced that the government sold €145 million worth of government bonds to local banks at an interest rate of 4.75 per cent. This was to show that despite the downgrade it could still borrow money at relatively competitive rates. Never mind that it reduced market liquidity, by borrowing from Cypriot banks.
In another attempt to divert attention, it was reported that the President gave instructions for experts to assess the impact on the economy of the unrest in Arab countries. This decision was relayed on the day of the downgrade by the finance minister who said that the experts would analyse the “various possible consequences” on the economy, including inflationary pressures, caused by the soaring oil prices. Was this something that had to be announced? We thought that whenever there is crisis that could affect the economy, it is a matter of routine for the finance ministry’s experts to analyse the consequences. Does the president need to give instructions for experts to do the job they are paid to do?
It was yet another transparent attempt to promote the myth that President Christofias and his government were pro-active and completely in control of things, despite the downgrade. The government might not be able to fool the rating agencies and the international markets about its unwillingness to take measures, but hopes its crude communications strategy would fool an adequate number of Cypriot voters, particularly with parliamentary elections less than three months away.
This is what the government’s economic policy consists of – diverting attention away from the president’s inaction and fear of taking decisions with communications tricks and gimmicks. But not even the most sophisticated communications strategy would succeed in covering up the collapse of the economy that would be inevitable if the president continues to ignore the downgrades and other warnings.
