THE GOVERNMENT may have done a good job of stabilising the economy and eventually putting it back on the path to growth after the meltdown of March 2013, but there are signs that things are not going as well as some think.
In the last few days it was reported that the yields on Cyprus government bonds were rising in the secondary market, which is not the best sign for an economy on the verge of exiting an assistance programme, even if the finance minister has ruled out the need for any credit line from international lenders.
The yield of the 10-year government bond which was issued in October and stood at 3.7 per cent in December had risen to 3.82 per cent in January while that of the seven-year bond issued in April rose from 3.14 per cent to 3.24 per cent in the same period. This could be described as a negligible increase, but it should be noted that the yields of German and Italian government bonds fell during the same period according to data of the Bank of Cyprus. Yields were rising instead of falling, at a time of bearish stock markets.
The increases may be just a glitch, a small and brief anomaly, but they could also be an indication the markets are having some doubts – minor at present – about the ability of Cyprus’ economy to cope once it exits the assistance programme in March. Last week, the head of the fiscal council, Demetris Georgiades told the Business Mail, “it is clear that there is resistance to reforms, including privatisations, which analysts take into account and this is a cause for concern.”
It is already looking likely that Cyprus will complete its adjustment programme without implementing some of the reforms it had agreed to such as the privatisation of CyTA, which all opposition parties are set to reject. This could be seen as a sign the country will return to the old profligate ways, dictated by unions in cahoots with populist politicians that led to the need for a bailout. When we consider that the government did the minimum required to stabilise the economy during the adjustment programme, avoiding the desperately-needed, radical reform of the public sector for fear of upsetting the unions, fears of a return to our old habits are not unjustified.
Finance Minister Harris Georgiades may be of the view that everything is under control and the fiscal discipline that he has imposed will continue, but he is not in control. President Anastasiades has displayed his populist tendencies and inclination to pander to the unions on countless occasions over the last three years and he was the main reason that the reform of the public sector was so very superficial. In fact, the inequality in earnings between public and private sector workers has increased during the adjustment programme because the pay cuts in the former were much smaller than those in the latter. Yet Anastasiades, only a few months after signing the memorandum, was giving assurances that public servants would not be asked to make any more ‘sacrifices’, and he has kept his word.
Can such a populist be trusted to maintain fiscal discipline once the troika is out of the picture? The danger is that the markets will react negatively to any signs of a return to the old reckless methods of running the economy. It is not even as if the modest growth rates forecasted for this and next year (1.5 and 2 per cent) could justify any laxness on the part of the government. Discipline and balanced budgets, which the big-spenders of AKEL slam as “austerity”, are imperative because any signs of laxness could be punished by the markets and deprive us again of funding.
We are not being alarmist, but we know the irresponsible, short-term thinking of our politicians, who are very good at ganging up against the small minority of their colleagues advocating prudence and caution. This is why it is vitally important to take the signals sent by the markets seriously. The increases in the yields were marginal and nothing to worry about at present, but they were also a reminder and warning of how things could veer out of control, without anyone realising it, as happened in 2011. It took four years and the worst recession in our history before Cyprus was able to return the markets. We can ill afford a repeat.
