THE DEAL struck by European leaders on Thursday aiming at helping Greece overcome its debt crisis and prevent contagion to other euro area countries gives Cyprus another chance to deal with its structural and fiscal challenges and no time for complacency, economists say.
“The deal is significant,” head of economic research at Marfin Popular Bank, Yiannis Tirkides told the Sunday Mail. “It provides access to the European Financial Stability Facility (EFSF) to countries already, before they have to apply for support”.
For Cyprus, which also saw its borrowing cost rise in recent months, “it is something positive,” since even after the deal, Cyprus remains in the “danger zone,” he added.
The macroeconomic situation worsened after the July 11 blast that damaged the Vassilikos power station as it will cause inflationary pressures and have a negative impact on growth.
First ministry of finance estimations expect that this year’s growth will be zero per cent instead 1.5 per cent as initially forecast, while growth forecast for 2012 was slashed to 1.5 per cent from 2.5 per cent, Christos Patsalides, permanent secretary at the ministry of finance said.
The leaders of Eurozone countries agreed on Thursday on a package that includes private sector involvement on a voluntary basis to extend the maturities of Greek loans from a minimum of 15 years up to 30 years and reduce interest rates for future loans, according to EU’s president Herman van Rompuy. The deal also provides for more flexibility for the EFSF to intervene and improved governance in the Eurozone to prevent similar problems arising in the future.
“It is the first time we see a plan in place to address Greece’s liquidity problems until 2020 and the viability of the country’s debt,” Marios Demetriades, head fund manager at the Piraeus Bank in Nicosia said.
Given the inter-relation between the Cypriot and Greek banking systems, the deal also secures the stability of Cyprus’ banking system, even as it is still unclear how banks in possession of Greek bonds will be impacted, Demetriades said. “We must wait and see how this will be reflected in the books,” he added.
Credit rating agencies downgraded Cyprus’ sovereign credit rating by several notches in recent months citing the exposure of its banks to Greece.
Even as “the likelihood Greece will default is smaller now following the deal,” Cyprus will continue to experience fiscal pressures through high borrowing costs, economist and DISY MP Marios Mavrides said. “The reason for this is that our budget situation is not viable”.
The reduced likelihood for Greece to default, which was one of the reasons behind the recent increase of Cyprus’ borrowing costs, combined with the new mandate of the EFSF, may result to lower yields for Cypriot securities, according to Mavrides. “But it won’t be substantial,” he said. “They are merely giving us another chance”.
“Pressures will begin to escalate as of next year,” for Cyprus, as the government secured already adequate funding for this year, Tirkides said.
“As it stands now, the government cannot tap funding from international markets, which means that increasingly the government will be drawing on domestic resources,” he added. This will finally lead to a “crowding-out effect,” a term which economists use to describe a reduction of private consumption and investment caused by increased government borrowing, according to Tirkides.
Therefore Cyprus should take advantage of the time remaining before its borrowing costs problems worsen and go ahead with structural reforms to facilitate growth and with fiscal consolidation as soon as possible, Demetriades said.
The “Marshall Plan” for Greece may have no effect unless the country changes legislation that make labour rules inflexible, Demetriades said to explain the need for structural reforms that can help Cyprus’ economy recover after the destruction of the Vassilikos power plant.
“Deutsche Telekom refuses to buy more shares in Greece’s telecommunication company OTE, as workers there still enjoy a job guarantee. Therefore, such problems should also be addressed in the Electricity Authority of Cyprus if it wants a private investor to jump in after the Mari explosion”.
