Cyprus is poised for deeper austerity in 2014, in a bid to cope with the contraction of the economy expected to be sharper than the 8.7% of GDP projected in a €10 billion bailout that imposed an unprecedented haircut on uninsured bank deposits.
In an interview with CNA, Cyprus Minister of Finance Haris Georgiades said the 2014 state budget, the first to be drafted after the bailout agreed with Cyprus’ lenders, the European Commission, the European Central Bank and the International Monetary Fund, collectively known as the Troika, will include significant cuts in public expenditure.
Georgiades did not rule out additional cuts in the public sector salaries, noting however that the cost of the civil service could shrink by freezing recruitment of employees in the public and broader public sector.
Furthermore, Georgiades said the Ministry will exert every effort to meet the fiscal targets for 2013, pointing out however that both he, as well as the Troika, consider 2014 and the next three years as more important for the course of the Cypriot economy, rather than the remaining part of 2013.
In his interview, the Cypriot Minister underlined that the current capital controls imposed on the island`s banking system constitutes the biggest and most pressing problem currently facing the economy, noting that these controls will be gradually eased.
Furthermore, Georgiades pointed out the memorandum of understanding signed between Cyprus and the Troika represents a landmark for the Cypriot economy, noting that “it is up to us to make sure the memorandum would not constitute the end of the road but a new beginning.”
Excluded from financial markets, Cyprus agreed on a €10 billion bailout which includes a haircut of uninsured bank deposits (over €100,000) in a bid to recapitalize Cyprus` two largest banks, which posted mammoth losses after writing down their Greek sovereign bond holdings following the Greek public debt haircut. Out of the 10 billion, only 2.5 billion will be used to plug the capital needs of the remaining banks, while the remaining 7.5 billion will be used for maturing debt repayment and to cover the public sector needs.
Nicosia also agreed on fiscal consolidation measures, cuts in the public sector wages, reduction of welfare allowances and structural reforms in a bid to achieve a primary surplus of 4% of GDP in 2018. As a result of the planned correction, Troika projects that the Cypriot economy will contract by 8.7% in 2013 and by 3.9% in 2015 followed by a modest 1.1% growth in 2016, projections described by economists as overoptimistic.
"Possibly the contraction will be worse," Georgiades told CNA without giving further details, noting that "the government will not operate on the basis of optimistic scenarios that will be revised on the downside as was the case in the past but on the basis of realistic and conservative approaches so that we can be sure that our plans concerning the state budget and the public spending will always remain in the right context however pressing that is."
He said the government aims at breaking the vicious circle which has been affecting the Cypriot economy as soon as possible, ensuring stability, recovery and growth.
"This will happen easily, this will not happen overnight, things will get worse before they get better but without a doubt difficult and bold decisions are necessary," he added.
Responding to a question whether the target set out in the memorandum for a 2.4% of GDP primary deficit will be met, Georgiades told CNA that the Ministry would make every effort for the remaining six months until the year end, noting however that both he and the Troika consider the next three years as more important.
"A programme review will not be determined by six months but by the broader implementation of the adjustment programme, that is, the implementation of structural reforms and public sector measures in a three-year horizon," he said, adding that "that is why I place greater importance on the next budget rather than the remaining part of 2013."
Invited to comment on press reports that the Ministry plans to slush public spending by 700 million in 2014, Georgiades said the 2014 budget would be strict with ceilings in public expenditure.
"We began drafting a budget which will provide for significant expenditure cuts," he said, without elaborating, adding that "spending cuts will be inevitably significant because the decline in state revenues will also be sizeable."
Replying to a question whether these spending cuts will include reduction in the public sector wage bill, Georgiades said each and every euro paid will have to be justified, noting he could not determine in advance where from these spending cuts will emerge.
"The wage bill, of course, should be reduced but this could be achieved primarily through the extension of the freezing of the hiring of employees in the public sector," he said. The memorandum stipulates that in a bid to reduce the size of the public sector the government will enforce a formula providing for one hiring for every four retirements in the public sector.
On privatizations, an issue included in the Memorandum, Georgiades said the government will conclude an inventory of the assets of the governmental and semi-governmental organizations as well as evaluation of their prospects, adding the issue of privatizations will be examined at a later stage.
He noted, however, that the result of the process cannot be determined in advance.
Responding to a question on the lifting of capital controls, imposed on the banking sector, that have been in place since the Eurogroup decision which imposed the haircut on uninsured deposits, Georgiades reiterated that the government wishes these controls to be lifted the soonest possible.
“The government’s wish is that these controls should be lifted the soonest possible because we acknowledge that this is the biggest and most pressing problem currently facing the Cypriot economy,” he pointed out.
Recalling that the restrictive measures have been relaxed since March, Georgiades noted, however, that the lifting of the restriction cannot be attached to a timeframe but to the progress and the bahaviour of the banking system and the market itself.
“I must point out that this will me made on the basis of joint decisions with the Central Bank of Cyprus and the Troika. It is the government’s wish that the restrictions will be gradually eased until their eventual lifting”.
Invited to clarify comments he had made to the Cyprus state television that the government would require the continuation of the European Central Bank (ECB) emergency liquidity support, for Bank of Cyprus, which under the terms of the memorandum absorbed the “good part” (loans and insured deposits) of Cyprus Popular Bank which will be liquidated, Georgiades said the government requested from the Troika that the decisions taken for the largest possible support to the Cypriot banking system and particularly Bank of Cyprus should be observed.
He stressed, however, that this issue depends on the completion of the transition in Bank of Cyprus, which undergoes a consolidation process and has been managed by an administrator since the absorption of the assets and liabilities of Cyprus Popular Bank, including €9.2 billion of Emergency Liquidity Assistance provided by the ECB.
This issue has sparked a confrontation with the Central Bank of Cyprus which acting as Resolution Authority has assigned in interim Board of Directors and an interim Chief Executive Officer until the next stock holders General Meeting to be convened after the finalization of the haircut. Central Bank has said that the Bank would exit from the consolidation status in late July.
Georgiades noted that the issue is not the completion of the consolidation process, which may occur, in July but the moves that should be undertaken in the meantime. “The Bank now has a Board and a CEO and should operate as a Bank… there are moves that should be undertaken, such as internal restructuring, issues concerning the employees and the restoration of its relations with its customers without waiting for the completion of the procedures,” the Cypriot Finance Minister concluded.
