Cyprus faces pain unless austerity taken, says centralbanker

Cyprus needs an effective fiscal consolidation plan to regain trust of the markets, but failure to do so will trigger an "exceptionally unpleasant" downward spiral, Central Bank governor Athanasios Orphanides was quoted as saying on Saturday.
Orphanides, a member of the Governing Council of the ECB, said delays in addressing economic problems would ultimately lead to painful cutbacks and steep taxes, impacting Cyprus's role as an international finance centre.
"It is the obligation of all to support an adequate fiscal consolidation package," Orphanides was quoted as telling the Phileleftheros daily.
"If we also fail this time to apply a credible package of measures, Cyprus will be in an exceptionally unpleasant situation which will unavoidably lead it into adventure, with profound economic and social implications for our future and that of our children."
Cyprus is one of the smallest member states of the euro zone. Its 17 billion euro economy has staggered from exposure of its banks to debt-crippled Greece and stunted growth exacerbated by a munitions blast which destroyed the island's largest power station this year.
Orphanides said fiscal tightening adopted this year was insufficient because it had been too late. Authorities trimmed public sector salaries in August and say they will cut back on student and child grants.
However, labour unions have been hostile to more recent finance ministry proposals for a two-year freeze on pay increments. Government attempts to raise VAT to 17% from 15 have also been pending for some months.
Orphanides said government and parliament had to act in concert to convince labour unions to get on board because Cyprus "was at the edge of the precipice".
"The price we will pay tomorrow will be incomparably larger than what we are called to pay today," he said.
Ratings agencies have downgraded Cyprus repeatedly in the past year on worries at the exposure of its banking system to Greece, and fiscal slippage.
Cyprus's international borrowing costs have shot up. The yield on a 10-year benchmark was 10.80% on Friday. The island has been shut out of international capital markets and recently signed a 2.5 bln euro loan from Russia.