.
By Shavasb Bohdjalian
Cyprus’ economic crisis is set to worsen in 2012 making 2011 look like a holiday with both external and internal factors playing havoc with the economy. A study by the OECD confirmed IMF forecasts that the world economy is again on a slippery road with the eurozone tipping into a recession. Even mighty China is slowing, Japan’s exports are tumbling, Eastern Europe is starting to crack while the improving economic situation in the US has become clouded as a recovery in factory activity is not matched with an increase in consumer spending.
Against this uncertain backdrop, financial markets are likely to remain volatile as the European debt crisis widens and across the Atlantic, U.S. lawmakers cannot agree on a formula on slashing the budget deficit.
The biggest problem facing the eurozone, which will have a direct impact on Cyprus is the inability of member states to rollover their debt at affordable levels. If during 2011 the problematic states were the so-called PIGS – Portugal, Ireland, Greece and Spain, the situation will worsen as Italy, France, Belgium and even mighty Germany will need to pay a higher price to rollover their maturing debt.
With the economies of the eurozone and other EU members in recession, the additional cost of refinancing will hurt efforts to reduce budget deficits, resulting in more austerity by member states, which will add to the economic pain.
Cyprus will be no exception. It faces billions of debt refinancing and even if it manages to secure the EUR 2.5 bln loan from Russia at favourable rate, it will still pay excessive rates to rollover other maturing debt.
Goldman Sachs warned on Friday that the public sector funding problems, which are hurting bank profits, are restricting household and corporate credit in Europe. This "could turn the moderate recession we are forecasting into something more akin to the 2008/09 experience" Reuters reported quoting the GS report.
Lack of credit is the next big issue facing Cyprus and other countries. With 95% of all businesses in Cyprus having little capital, all are dependent on the banks to extend them credit facilities against mortgaged property or personal guarantees. Since banks have toughened up their lending rules, and faced with declining sales and losses, companies are finding it increasingly difficult to secure additional loans from the banks to stay afloat. The pace of business closures is sure to intensify in 2012 resulting in layoffs, reduced consumer spending, lower taxation and hence the need for more austerity.
Efforts by Finance Minister Kikis Kazamias to impose a 2-year civil service wage freeze is also likely to have a negative impact on consumer spending considering that the 70.000 strong civil service employees are the best paid group after the bank employees. But even the bank employees will be affected as banks, facing the threat of passing into state hands, will have to proceed with broad-based wage freeze and probably with pay cuts to shore up capital.
In view of the crisis, the government, major corporations and other countries with whom Cyprus has close economic ties will need to proceed with austerity measures which will only add to the current woes facing the public.
The problem with new austerity and revenue raising measures when combined with recessionary situation means higher taxes, so there is a good chance that the government will come back with a request to increase the corporate tax rate, in an effort to cover the budget hole, which will force many international companies to flee Cyprus and probably cause business closure and job cuts in the once-booming financial services sector.
Unfortunately, there is no quick cure to fix all the problems and this is why we should all brace for a much tougher 2012, and certainly much worse and painful than 2011.
www.eurivex.com,
[email protected]
(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nominated Advisor for listings on the Emerging Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
