CYPRUS: Clouds remain over court decision on civil service pay cuts

8 mins read

While preparing to fence off consequences of an Administrative Court decision which renders pay cuts on public servants back in 2012, unconstitutional, the government appears to be at sea over what the state will be called to pay in compensation and whether it will have to reinstate salaries to pre-crisis levels.

Pay cuts were part of austerity measures imposed by a cash-strapped government that tried to reign in debt as the economy went into meltdown seven years ago, as a result of a runaway public sector deficit and the banking sector’s uncontrolled exposure to toxic Greek government bonds.

As a result, banks resorted to an excessive ‘bail-in’ haircut of deposits in order to remain afloat and a ‘bailout’ kicked in to keep the economy from collapsing. Private sector unemployment spiralled and wages were slashed to below half, while civil servants did not get the sack and their pay was trimmed with pay increases suspended.

Information leaked to the press after President Nicos Anastasiades’ meeting with political party leaders on Monday, has all parties concerned over the developments. Reportedly, Anastasiades had told party leaders that he is not at a position to confirm that the government will only have to compensate public servants who have taken legal action.

He reportedly said that he was unable to adopt views of legal advisors that the first instance decision would concern only the 101 civil servants who had appealed to the court and not all the employees in the public and wider public sector.

Anastasiades stressed that it is of paramount importance that the government succeeds in suspending the payment of compensations, so that, as he noted, the state could gain time, until it proceeded to cooperate with parliament to promote measures and possibly change the constituent article in question.

In comments during a Sigma TV debate on Monday night, former Attorney General Alekos Markides wondered how the government could not have come to a definite conclusion on what the burden will be on state coffers, especially after so many days.

While previous estimates from governmental officials and others suggested a cost reaching EUR 1 bln, Finance Minister Harris Georgiades was reported to have told political leaders at the meeting that this will be closer to EUR 1.6 bln. As DIKO’s chairman Nikolas Papadopoulos told reporters after the meeting, this figure does not take into account wage increases for civil servants, which have been frozen for seven years.


Reinstating pay could cost EUR 2 bln

DISY president Averof Neophytou later said the court decision and reinstating civil servants’ pay could cost taxpayers about EUR 2 bln.

Alongside legal action, the government plans to reach an understanding with parliamentary parties and unions in order to preserve the fiscal balance preventing the state from losing hundreds of millions of euros.

It is understood that the government will seek to utilise to the fullest an agreement reached last year with unions SEK and PEO to gradually restore wages back to pre-2012 levels by 2023.

Meanwhile, economists have expressed concerns over the turn of events, with some noting that a second bailout maybe in the cards, if the government is not able to minimise losses from the court’s decision.

“If the government has to pay off more than the hundred people who sued the government, then we are heading for a recession, with lenders knocking at our door,” economist Chris Savva told the Financial Mirror.

Savva considers it a certainty that the government will have to compensate retired civil servants, as the EU has already ruled that pensions are considered a property asset, which is to be protected.

“In any case, the public debt to GDP ratio will be affected,” said Savva.


Not keeping a tight lid on state coffers

“The problem is not so much whether the government will have to compensate a number of people affected but it rather lays in the mentality of governments in Cyprus who are not keeping a tight lid on state coffers, giving in to a series of demands, especially from employees of the wider public and quasi-state sector,” he added.

Yiannis Tirkides, head of Bank of Cyprus’ research unit, said that the ruling of the administrative court on the unconstitutionality pay cuts in the public sector from 2012 onwards will have serious implications for public finances, reverse the progress made regarding public debt, and erode the credibility of the economic system.

"This will have a major impact on the government's credit rating with an open prospect of downgrading and losing access to international markets," he said.

"The decision of the administrative court is the least contradictory. Bankruptcy in the country was avoided in 2013 due to EU, ECB and IMF financial assistance [the “Troika”], and due to the fiscal consolidation measures which followed. If such a decision were to be implemented in 2013, Cyprus would now be bankrupt.

“What moral or other basis do we have today to reverse the fiscal measures that were the prerequisites for providing financial assistance that prevented bankruptcy? " wondered Tirkides.

International rating agencies are preparing ratings updates on the Cyprus economy.

Fitch is to review the state of the Cypriot economy next Friday, April 12, before even an appeal on the matter is submitted.

In October, Fitch had raised the Cypriot economy to ‘investment grade’ with a stable horizon, which means that no change was expected within the next 12-15 months.

Fiscal Council president Demetris Georgiades, in comments to the Financial Mirror, said that there is another aspect to the already thorny matter, which has to do with the country’s image presented to investors.

“The lawsuit was filed in 2012, it took the courts seven years to rule on the matter, and the issue is not over yet as the government is to appeal. This certainly adds to the already negative impression foreign investors have regarding our juridical system. A troublesome justice system is a turnoff for investors,” said Georgiades.