Cyprus economy in ‘state of emergency’ says central banker

Cyprus may need a bailout to cope with its worst peacetime disaster from a munitions blast unless urgent action is taken to improve the country's finances, Central Bank Governor Athanasios Orphanides has warned.
Faced with a possible collapse of his coalition government after his Foreign Minister quit on Tuesday, the warning could not have come at a worse time for President Demetris Christofias who faces falling popularity due to his handling of core political, economic and social issues.
Already under market pressure because of its links to debt-laden Greece, the Financial Mirror reported last week that the island could face a bill of at least 1 bln euros after the blast ten days ago decimated its largest power station at Vassiliko, knocking out half of the island’s power supply.
Cyprus, one of the euro zone's smallest members, has a GDP of 17.4 bln euros and relies heavily on tourism, as well as maritime and financial services, but the disaster is expected to reduce growth to 0% from 1.5% projected earlier for the year, having just exited a recession in 2010.
Orphanides, a member of the Governing Council of the European Central Bank, said authorities needed to take tougher austerity measures than those under discussion prior to the July 11 blast.
"To avoid the worst, including among others admission into (a) support mechanism and all that that entails for the economy and the national issue, further and more drastic measures must be taken immediately," he said in a letter sent on Monday to President Christofias and political party leaders.
The letter mentioned no specific measures which the central banker wants the government to take, but Orphanides, a former senior adviser for the U.S. Federal Reserve, said he was willing to help in any way possible to overcome the crisis. Relations between him and Christofias have soured in recent months after the central banker warned that maintaining the current high public expenditure would cause serious problems to the economy, defying the president’s attempts to paint a rosier picture.
It is the first time Orphanides has suggested Cyprus may need to enter a support mechanism, even though the island's borrowing costs had been rising before the blast.
The yield on a 10-year government bond issued to international investors in February 2010 was bid at 8.9% on Wednesday, up from 8.6% a week ago and around 6.20% in early May. Cyprus has met its financing needs from the domestic market this year and its secondary market for international debt is very thin.

"STATE OF EMERGENCY"

"Weighing up all the facts, the unfavourable international environment, the difficulties in resorting to external borrowing and the additional economic impact from the recent events, I believe that the economy is in a state of emergency, comparable to that of 1974," Orphanides wrote.
He was referring to the Turkish invasion of northern Cyprus in 1974 and occupation of the most fertile farmland, popular resorts and industries that brought the economy to a standstill for several years.
A copy of the one-page letter obtained by Reuters was forwarded to Christofias before an emergency meeting with party leaders on Monday. The meeting assessed an austerity package already under discussion, and the impact of the blast.
Cyprus has already asked for European Union aid to deal with the aftermath of the explosion, and EU officials have been assessing the damage.
With a budget deficit of 5.1% of GDP and overall public debt of around 60%, Cyprus is in much better fiscal shape than euro zone bailout recipients Greece, Ireland and Portugal.
But damage from the disaster is still difficult to quantify.
Prior to the blast, authorities were discussing an austerity package to cut the number of civil servants, abolish semi-government corporations and introduce small scaled pay cuts in the civil service. Further austerity measures are now under consideration, a finance ministry source said.
Thousands of Cypriots have staged protests demanding the resignation of Christofias, whose foreign and defence ministers quit in the wake of the disaster.

KYPRIANOU QUITS

Christofias lost a key ally when Foreign Minister Markos Kyprianou quit on Tuesday, weakening the ruling coalition just as the island's press said the recent destruction of a power station by a munitions blast might push the economy into recession.
Kyprianou is an influential member of the Democratic Party, the junior partner in the ruling centre-left coalition. His departure could herald the exit of the party from the government forged with Christofias's communist AKEL party.
The July 11 explosion of 98 containers full of confiscated Iranian munitions, stored at a naval base, knocked out the largest power plant and and killed 13 people.
Kyprianou's ministry was involved in the confiscation of the arms and handled the political fallout with Iran and Syria.
Christofias's failure to apologise for the blast has angered Cypriots, who have called him a criminal and a murderer. Thousands took to the streets in an unprecedented display of anger at the lax storage conditions of the munitions, demanding his resignation.

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