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Reading a Reuters report on the problems facing Italy and its embattled leader, I see many similarities in the problems facing both Cyprus and Italy. After many months of indecision, both Cyprus and Italy are still wrangling over how best to balance their budget, losing credibility with their fellow EU partners, rating agencies and at the same time frustrating investors who are needed to bankroll their deficits.
The Italian government headed by Silvio Berlusconi and the government headed by President Demetris Christofias are being resoundingly criticized for their handling of the economy. Both leaders are facing judicial inquiries for mishandling other sensitive issues and are disliked by the general public. Berlusconi for the repeated sex, political and bribery scandals, while Christofias for the Mari/Vassiliko blast.
Italy's government debt of 119 percent of gross domestic product in 2010 was second only to Greece in the euro zone, according to Eurostat while the government debt of Cyprus is also above the 100 percent level, if one would include the real obligations of the government to the social security fund.
The bond yield of both nations is at record levels. The Cyprus 10-year bond yield is above 12 percent, indicating that investors fear higher risk of default whereas the 10-year bond yield of Italy recently stabilized following repeated intervention by the European Central Bank (ECB), which nevertheless is again rising because the Italian government is unable to agree on its austerity measures.
There are concerns that Berlusconi's government is attempting to water down some of the measures agreed as part of the 45 billion euros austerity package which is aimed at balancing the budget by 2013, Reuters reported on Monday.
President Christofias is also accused by the opposition for backtracking on a broad-based austerity package agreed at the Presidential Palace before the Vassiliko blast, which was subsequently watered down to please trade unions. Following the passage of the first austerity package late August, everybody is now waiting for the tabling of the second austerity packages, which among others will also include a hike in the VAT rate by two percentage points to 17 percent.
The problems facing both Cyprus and Italy can be cured if both nations had leaders who could take the initiative and take decisive action to correct imbalances. No nation is perfect and everybody has its own problems. But there are nations like the UK, headed by the coalition leader David Cameron who since the first day he took power has moved to shore up state finances and there are nations like Greece, who repeatedly break their own rules, violate the pledges they have given their partners and cannot take decisive action to solve their problems.
The government has no place running a telecom company, an airline, the electricity generating organization, water supply, the stock exchange and irrelevant stakes in forestry, hotel and bakery sectors. Yet Cyprus has stakes in all these organizations, which are wasting the public money, are unproductive and are exploiting the general public by charging higher prices.
To be fair, public ownership is not this government’s fault. The right wing opposition Disy had a brilliant chance during the Clerides government to dump these stakes, and yet they did nothing and even added to their problems by plundering surplus funds and making stupid investments.
Then there is the issue of government size. The current system of low productivity, high salaries and benefits cannot be sustained and it’s obvious that the country cannot waste more than 70 cents on every euro collected to pay civil servant costs. A visionary leader would take the initiative to correct the situation, but Christofias is not showing any signs of coming up with solutions. Until such initiative is shown, Cyprus, like Italy and Greece will continue to suffer.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
