Cyprus cbank’s Orphanides sees economic rebound in 2011

Cyprus's economic downturn is close to a trough and the economy should rebound next year, the island's central bank Governor, Athanasios Orphanides, said on Monday.

"The baseline scenario is a mild drop in the economy for the whole year, but we are optimistic that we are close to the bottom," Orphanides, who is also a Governing Council member of the European Central Bank, told a news conference in Nicosia.

"2010 will be a difficult year," he said. The central bank forecast in June the island's economy would contract by 0.5 percent this year.

Ratings agency Standard and Poor's last week placed Cyprus on review for a possible downgrade, saying its A+ sovereign credit rating could be cut within three to four months if the government failed to act to improve its finances.

A downturn in tourism and real estate last year put pressure on government revenues, pushing the government's public deficit up to 6.1 percent of gross domestic product.

Cyprus accounts for 0.2 percent of the euro zone economy. Orphanides said its biggest economic problems were structural, and also due to a massive increase in public expenditure in 2008 and 2009.

"If we do not solve the problem now, it will just get bigger and bigger," he said.

The public shortfall could reach 7.1 percent in 2010 without corrective action, according to the European Commission.

The centre-left government on July 9 failed to get parliamentary approval to increase corporate tax to 11 percent, from 10 percent, and to change tax on real estate.

Parliament had in a majority vote criticised the move as stifling the private sector, while saying the government was doing little to control expenditure.