* Troika is back, but warns that any Cyprus bailout would need to see VAT hiked to 20%, minimum wage cut by 15%, COLA abolished and retirement age rise to 65 *
Employer federations and non-partisan economists have been vindicated: austerity measures and reforms that should have been introduced a long time ago will now be imposed on us if Cyprus has any hope of getting an international bailout it asked for last month.
The “evil” troika technocrats want discussions to focus on hiking VAT from 17% to 20%, cut the recently propped-up minimum wage by 15%, abolish the burdensome automatic cost of living allowance (COLA) and raise the mandatory retirement age from 63 to 65.
And if the government has the courage to proceed with these long-awaited reforms then there is a good chance that the 10% corporation tax will remain intact otherwise cause irreparable damage to the main driver of the services-based economy.
The ‘troika’ inspectors from the European Commission, the European Central Bank and the IMF launched their second round of consultations on Monday to pin down the island's needs to buffer its banking sector from severe losses over its exposure to Greece and pay down its runaway public sector deficit, becoming the fifth euro zone country to seek outside financial help.
The ‘troika’ teams met with officials from the Central Bank and the Ministry of Finance, as well as a ministerial committee tasked with advising the communist government on how to tackle the current crisis.
The new round of meetings are expected to include trade unions, employers and other social partners and should be completed by Friday, with the main focus on the banking sector.
"The meetings aim at developing common views with regard to the main challenges currently facing the Cyprus economy as well as the appropriate strategy and policy responses," the finance ministry said in a statement.
The government was left out of pocket after underwriting a 1.8 bln euro capital shortfall for the Popular Bank whit has effectively nationalised.
DEPLETED
Regulatory capital, an indicator of financial strength, was severely depleted for both Popular and the largest lender, Bank of Cyprus, when they were forced to take a writedown agreed by European leaders to make Greece's sovereign debt mountain more sustainable.
The decision dealt a critical blow to the Cypriot economy.
Combined, Popular and Bank of Cyprus require 2.3 bln euros in fresh regulatory capital and have looked to the government for assistance.
While concentrating on the banking sector, the technocrats are pursuing a bailout for the economy as a whole. It is unclear how much funding Cyprus may need, but markets are speculating on about 10 bln euros.
Rating agency Standard and Poor's last week said the bailout bill could reach up to 15 bln, taking into account existing and future banking needs, and future fiscal requirements.
OVERTURNED
Recent government decisions will have to be overturned as too painful for the island’s economy, which is why union-imposed labour costs are making Cyprus uncompetitive.
This year’s increase in the minimum wage will probably have to be cut by 15% from the current 909 euros, despite grumblings from unions that fear a chain effect hurting the public sector wages that are much higher than private sector employees.
Also, the pledge to freeze salaries has become a paradox as the COLA automatic wage indexation system has seen a 2.9% increase on wages in real terms, making the abolition of COLA an urgency, as suggested by the IMF for the past 20 years or so.
However, in order to safeguard the 10% corporation tax, which the ‘troika’ wants to see increased, the counter-proposal would be to hike VAT from the current 17% to 20%. This will probably be repeated to the troika inspectors by presidential candidate Nicos Anastassiades, employer associations OEV and KEVE, as well as the members of the accounting profession.
