CYPRUS: Clouds gather over court ruling on civil service pay cuts

9 mins read

While the government is all at sea over what the state is liable to pay in compensation after civil servant salary cuts in 2012, were deemed unconstitutional, private sector workers are now demanding pay rises and benefits lost during the crisis years.

Invoking the administrative court’s decision deeming pay cuts on civil servants, implemented by a cash-strapped government back in 2012, unconstitutional, bank employees union ETYK has requested the payment of annual compensation and the automatic adjustment of the Cost of Living Allowance (CoLA) for 2019.

ETYK's demand comes at a time when most of the banks have requested, as part of the renewal of collective agreements, to abolish automatic inflation-linked salaries and changes to the promotion system. 

It said that based on the precedent set by the courts, “employers should end the blatant violation of the existing agreements, the law and the Constitution itself".

Employers appear to be concerned over the impact this development will have on their businesses as they may see labour costs increase significantly overnight.

Bank officials estimate that ceding to ETYK's demands would increase labour costs by 5% overnight if they had to reinstate wages to pre-crisis levels.

Austerity measures imposed

Civil servants pay cuts were part of austerity measures imposed by a money-poor 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 by half, while civil servants did not get the sack, their pay was trimmed and increases suspended.

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

Reportedly, 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 the thousands employed in the wider public sector.

Anastasiades believes it paramount that the government succeeds in suspending the payment of compensation, so the state gains time for it proceeded with parliament to promote measures and possibly change the constitutional article in question.

In comments during a Sigma TV debate, 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 government 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 it could be closer to EUR 1.6 bln. DIKO’s leader Nicolas Papadopoulos told reporters, 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 estimates 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 union federations SEK and PEO to gradually restore wages back to pre-2012 levels by 2023.

Meanwhile, some economists argue that a second bailout may be on 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.

He 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.

“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,” Savva added. 

Yiannis Tirkides, head of Bank of Cyprus’ research unit, said the legal ruling 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 in 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 rating updates on the Cyprus economy.

Fitch is to review the state of the Cypriot economy 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 told the Financial Mirror 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.