Research Center
Cyprus Economy

Political row puts Cyprus austerity plans in doubt

25 July, 2011

 * Opposition accuses govt of backtracking *

Cyprus's austerity plans hung in the balance on Tuesday after opposition parties accused the government of backtracking on unpopular measures, even though authorities said they would press ahead with a fiscal consolidation package.
The government and opposition only last week said that they had agreed on a package and that more would be under discussion in the wake of the massive munitions blast which destroyed the island's largest power station on July 11, throwing Cyprus into its worst peacetime crisis.
Authorities had at the time declined to specify what they had agreed, with most information, such as plans to privatise the island's stock exchange, emerging through media leaks.
But a meeting called to discuss further belt-tightening ended in disarray after participants said the government had watered down the initial austerity package and had no further suggestions for fiscal improvement.
Parties including the main opposition party and the junior partner in Cyprus's centre-left coalition walked out.
"There is an unprecedented paradox here of the political opposition ignoring the political cost and insisting on the need for further fiscal measures, and the government not only refusing to take additional steps but nullifying what has already been agreed," said Averof Neophytou, deputy chairman of the Democratic Rally opposition party.
The government of Communist President Demetris Christofias, elected for a five-year term in 2008, is facing its toughest challenge after the blast. Thousands of Cypriots have taken to the streets demanding its resignation.

PACKAGE "STILL STANDS"

Finance minister Charilaos Stavrakis said the austerity package still stands, but said certain issues required negotiations with labour unions.
"It is the government's intention to adopt the package," he said, but he declined to take questions on the topic.
Last week, central bank governor Athanasios Orphanides warned that Cyprus could be forced to seek a bailout unless tougher economic austerity measures were taken immediately.
On July 1 the government presented a package which included provisions for scrapping a number of semi-governmental corporations and change the pension system for civil servants.
According to a document distributed by Neophytou, the privatisation of the bourse -- added subsequently -- the abolition of the semi-governmental bodies and the pensions issue have been dropped in a new Finance Ministry game plan.
Economists say Cyprus could face a bill of at least 1 billion euros from the damage to the power plant, which supplies half the country's electricity, and widespread disruption of business due to power cuts.
Neophytou said the cost could be in the region of 2.5 to 3.0 bln euros. Cyprus has a GDP of about 17.4 bln euros and its annual budgeted spending comes to about 8 bln euros.
The island is already facing rising borrowing costs on international markets because of pressure on euro zone periphery debt and the exposure of Cypriot banks to Greece, which has triggered ratings downgrades.
So far this year, Cyprus has been able to meet its financing requirements domestically.