Alarm bells ringing for Greek Cyprus

NICOSIA - Reuters

Eurozone member Greek Cyprus is showing “intense signs of recession” and authorities may have to consider further spending curbs in addition to a recently-announced austerity package, Central Bank governor Athanasios Orphanides said yesterday.

Orphanides, who is a member of the Governing Council of the European Central Bank (ECB), said fiscal deterioration had meant Greek Cyprus had lost access to international capital markets.
“Its very positive that the critical nature of this situation has been acknowledged,” he told the Finance Committee of parliament.

Greek Cyprus, the eurozone’s third-smallest economy, has come under pressure this year from fiscal slippage and exposure of its banks to Greek debt.

Government and opposition parties on Friday agreed to a further raft of austerity measures in a consensus which is crucial for a government which does not have a majority in parliament.

Orphanides said it was essential that the measures, which include freezing salaries in the public sector and additional taxes on private-sector income, were adopted, and he said structural adjustments should be made to further cut spending.

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High yields on its traded debt have effectively shut Greek Cyprus out of international capital markets and the island has said it plans to get a 2.5 billion euro loan from Russia to cover refinancing requirements in 2012.

“The most important consequence of fiscal deterioration has been losing our credibility as a state, with the result of being fully excluded from international markets since May,” Orphanides said. “Yields on Cypriot bonds have surged, to levels of countries which are already within the support mechanism.”
The yield on a 10-year benchmark Greek Cypriot bond issued in February 2010 was 10.8 percent yesterday.