WHEN did Greece finally realise that its day of reckoning had arrived? When the finance minister went abroad in search of funds to re-finance the country’s crippling debts and nobody was prepared to take the risk of lending it any more money? No matter how high the interest rate offered, there were no takers. After years of state profligacy, short-term thinking and scandalous mismanagement of the economy the country was bankrupt. Creditworthiness was zero and a bailout was the only hope of averting the complete collapse of the state.
Ireland and Portugal went down the same road and Cyprus now looks set to follow them. Rating agencies have repeatedly downgraded the banks and the sovereign debt and yet another downgrading is expected in the coming weeks; some say it could come as soon as tomorrow. There are already bankers privately saying that a bailout would be inevitable, given the government’s failure to tackle the structural problems of the economy and drastically cut its spending. So far, it has taken slapdash, stop-gap measures aimed at delaying the inevitable.
Finance minister Charilaos Stavrakis is fully aware of the danger, which is why he has avoided going to the international markets for funds in the last year. This year alone, the government has raised about a billion euro domestically, its latest auction of two-year bonds, on Wednesday, raising €715 million. The average yield of the bonds was 5 per cent, more than double the yield of bonds, with a similar maturity, auctioned 18 months ago.
Even Cypriot investors considered the government bonds relatively high risk. Cyprus’ big banks ignored the latest bond issue, the Co-operative Central Bank, which has close links with the government, taking the biggest chunk. In the last year bonds have been bought by co-op banks and semi-state organisations that are under the political control of the government. Meanwhile, yields on Cyprus’ international bonds have soared in the secondary market – the yield of the 10-year bond issued in February 2010, has risen from 4.2 per cent in the middle of last year to 8.2 per cent on Wednesday.
As one economist said, “the higher yield is Cyprus paying the price for the ratings downgrades by the international agencies”. The government has obviously noted that its bonds are following the same trend as Greek bonds, before the eventual collapse, which is why it has been relying on the domestic market for its borrowing requirements. But for how much longer would it be able to do so? Apart from taking liquidity out of the market, it is also helping push up interest rates, which is catastrophic in a time of sluggish economic activity.
Despite the overwhelming evidence suggesting we are heading for a collapse of the economy, President Christofias has been behaving as if everything is fine, sanctioning temporary, corrective measures that could only be described as laughable. The ineffectiveness of the measures and general malaise was also illustrated by the figures for the budget deficit in the first five months of this year – it is two-and-a-half times bigger than it was in 2010 for the same period, which would mean the government would have to borrow more money. And the cost of servicing the public debt is also rising – for the same period it is 64 per cent higher than last year – up from €126m to €207m.
The government inaction verges on criminal negligence – the ship is sinking and the captain although he could take action to save it, chooses to do nothing apart from pray for a miracle. Do we have to reach the point of needing a bailout, before Christofias and Stavrakis understand that tough measures are needed?
Fortunately, a small ray of hope appeared on Thursday with the leader of the opposition, Nicos Anastassiades, taking the initiative and publicly calling on the government to urgently arrange a meeting of the party leaders that would take decisions to save the economy from collapse. A few hours after Anastassiades’ call, the government spokesman announced a national council meeting on the economy for July 8, while the next day DIKO and AKEL agreed a package of proposals aimed at tackling the economy’s structural problems.
Opposition pressure combined with a desire to save his alliance with DIKO, forced the dithering Christofias to find a sense of urgency, after a delay of two years. And the fact that we are staring at the prospect of a bailout may help him find the political courage to implement some measures, despite the inevitable union opposition. We can only hope it would not be a case of too little too late.
