* Shiarlis pledges to meet 2012 budget deficit of 2.5-2.7%;
* Will take further corrective action if needed;
* Financial needs for 2012 met by Russian loan *
Cyprus Finance Minister Vasos Shiarlis has reassured bankers that the government is ready to support the local commercial banks, in cooperation with the Central Bank, as fiscal slippage and heavy exposure to the Greek banking sector have seen the island's credit ratings cut to junk by two of the world's three ratings agencies.
Shiarlis told chief executives of the island’s three main lenders (Andreas Eliades, Bank of Cyprus; Christos Stylianides, Laiki Bank; Makis Keravnos, Hellenic Bank), as well as the Director General of the Bankers’ Association, Michalis Kammas, that the government believed the banks were “solid”, repeating the comments spoken by his predecessor, Kikis Kazamias and Central Bank Governor Athanasios Orphanides.
The objective, Shiarlis said, is to tackle the economic crisis and lead the local economy to growth.
On Monday, the finance minister told MPs in his first parliamentary appearance that the government “will do whatever it takes” to ensure that its budget deficit stays within a target of 2.5 to 2.7% of gross domestic product this year.
“My predecessor gave a commitment that the deficit will be in the region of 2.5 to 2.7% in 2012, and that will be strictly adhered to, irrespective of developments,” he said.
"Should there be a deviation from that, we will be ready to take any action required to remain within that target," Shiarlis told the House Finance Committee.
Cyprus's deficit hit 6.0% in 2011. Two austerity packages adopted last September and December saw mild cuts in civil service salaries, a freeze in new recruitments, a staggered increase in income tax for private sector workers and a two point increase in sales tax to 17%.
However, only 11 months away from the next presidential elections, the government is scared of cutting down its civil service, seeking instead to secure financing from outside sources.
Cyprus took a 2.5 bln euro bilateral loan at 4.5% from Russia in late 2011. "Liquidity has been secured with the Russian loan," the minister said.
Shiarlis did not elaborate on measures which could be adopted if the deficit veers off target. He said authorities needed to be in a position to immediately react to correct imbalances. Imposing taxes is not the best way to tackle economic problems, he told MPs.
The deficit, he said, would fall to 0.5% of GDP in 2013. Legislation to be in line with the EU's 'fiscal compact' on zero deficits will be tabled to parliament soon.
"We anticipate that it will be submitted for approval in coming weeks. We will possibly be one of the first countries of the EU to have such a law," Shiarlis said.
Draft legislation submitted by an MP already calls for authorities to cut, by law, the deficit to zero in 2013, but finance minister’s reference to a 0.5% shortfall next year implies the government wants to wait.
BANK FUNDS
Furthermore, Shiarlis told parliament that the state will exhaust all measures to obtain funds to recapitalise the banks. State participation in the recapitalisation of the banks must be the last resort, he pointed out, adding that it is the Central Bank’s obligation to look for foreign investors interested to take part. Following any recapitaliszation of the banks, the Ministry of Finance will deal with the liquidity problem, Shiarlis explained.
The FinMin is expected to decide later in the week whether the Canadian Triple Five conglomerate will be able to invest in government bonds issued by Cyprus.
By the end of the week, the Minister is expected to conclude his meetings with political parties and the social partners starting Wednesday, to discuss the cost-of-living-adjustment.
