GREECE’S mounting debt crisis had the Cyprus stock market spooked yesterday, with leading economists sounding the alarm that the economy could be on a slippery slope unless immediate corrective steps are taken.
The Cyprus Stock Exchange (CSE) closed on a 27-month low, the index dropping to 743.6 and registering losses of 3.11 per cent.
In particular bank shares took a tumble, with Marfin Popular Bank falling almost five percentage points, Hellenic’s 3.28 per cent and Bank of Cyprus 2.48 per cent down, closing at €1.98.
Jittery investors were reacting to the unfolding political uncertainty in neighbouring Greece, where Prime Minister George Papandreou was trying to pass the austerity measures needed for the EU and IMF to continue making their payments under the original bailout.
On June 13 Standard & Poor’s downgraded Greece’s credit rating, handing it the lowest rating in the world and noting the country is “increasingly likely” to face debt restructuring.
Fitch Ratings recently cut Cyprus’ sovereign rating by three notches, saying it was concerned about its banks’ exposure to Greek debt and the impact this could have on the island’s finances.
The agency said that it believed Cypriot banks were “relatively well placed” to absorb the impact of an assumed 50 per cent haircut on Greek bonds, but that worse-case scenarios could have a knock-on effect on Cyprus’ own debt profile.
Fitch’s downgrade was one of a series visited on Cyprus of late, taking its toll on the country’s credit rating and raising the cost of borrowing in foreign markets.
Former Finance Minister Michalis Sarris, who after leaving office has kept a low profile, sounded a warning:
“Currently, our cost of borrowing is 500 base points higher than Germany’s. It is now up to the state to assume its responsibilities and send a message abroad that is loud and clear. Soon, the headlines in Europe must start saying that Cyprus has turned a leaf, instead of saying that we are following in Greece’s footsteps.”
Noting that the economy would “surely” be affected by developments in Greece, Sarris said Cyprus nevertheless had enough time to take corrective steps.
He went on to call for a “revised, bolder budget” for 2011 that would cut state expenditures across the board.
“Doing nothing is not an option,” Sarris said in comments to the state broadcaster. “If we let things get out of control, then we shall start losing jobs. We need to take relatively mild actions now, rather than doing something far harsher a few years later.”
He added: “Everyone is drowning in debt: the state, businesses, households. This is because we used to live beyond our means. At some point the music will stop, and there won’t be enough chairs left for everyone.”
Economic analyst Dr. Stelios Platis cautioned that as long as the Greek crisis persists, Cyprus would “remain in the eye of the storm.”
“Right or wrong, the [foreign] markets’ assessment is that Cyprus is next in line to enter a support mechanism, much like Greece. Consider: right now our loan spreads are as bad as Portugal’s when that country was about to receive financial support.”
“On the other hand, the amount of government debt maturing within 2011 could be considered as manageable without having to revert to the markets, which might lead us into a support mechanism.”
“Comparisons with Greece are unfair – but the markets don’t care about that. There, their problems mostly have to do with mismanagement and corruption. Here, it’s to do with civil servants’ accrued rights. What we need to do is send a clear signal that we’re putting our finances in order: focus on economic growth, slash the civil service payroll, and reform the pensions system.”
On Wednesday, Finance Minister Charilaos Stavrakis projected confidence when asked how the Greek crisis would affect Cyprus.
“We feel that, even if hypothetically Greece were to face serious problems, our banking system could cope.”
The administration has set a goal of reining the public deficit to below 4.5 per cent this year and reducing government debt to around 60 per cent of GDP.
To do that, it needs among other things the civil service payroll – a major drain on state finances – and it is currently negotiating with the civil servants union for halting pay rises.
