Cyprus faces very serious macroeconomic imbalances, EU Commissioner for Economic and Monertary Affairs Olli Rehn has said.
Replying on behalf of the EU Commission to a question raised by Cyprus Member of the European Parliament Eleni Theocharous, Rehn noted that the Commission’s in-depth review on the Cyprus economy has confirmed that Cyprus faces very serious macroeconomic imbalances.
Theocharous raised a question for written answer to the Commission on May 15, 2012. Theocharous asked if the Cypriot Government should take fiscal discipline or other measures and, if there is a danger of Cyprus entering the support mechanism.
“The Cypriot economy is faced with imminent challenges that require urgent policy action on the financial, fiscal and structural fronts. On the fiscal front, Cyprus undergoes a year of large-scale fiscal consolidation effort in order to correct its excessive-deficit at a time when the economy is in recession and short-term prospects for recovery are vague, making full implementation of the budgetary strategy imperative”, Olli Rehn stated in his written reply.
“On the financial front”, Rehn added, “the implications from the exposure of the banking sector to Greece following loses on the Greek government bonds under the PSI and the asset quality deterioration in both Cyprus and Greece require a substantial increase of the two largest banks` capital base to reach the regulatory minimum as requested by the EBA”.
Rehn also said that macroeconomic developments as reflected in current account, public finances, and the financial sector require close monitoring and urgent economic policy attention while structural reforms in the labour market, services and health sectors, and in wage indexation should be in government’s focal attention.
The Commissioner referred to Cyprus request, on June 25 2012, for external financial assistance from the EFSF/ESM to contain the risks arising in the banking sector and in the presence of macroeconomic imbalances, adding that a request for assistance was also sent to the IMF.
“The adjustment programme will be designed to ensure financial stability, fiscal adjustment and structural reforms to support competitiveness and to allow Cyprus to return to a sustainable growth path”, he concluded.
