Cyprus' political party leaders meet Friday, seeking to hammer out an emergency austerity package to ease market fears that an escalating economic crisis and exposure to Greek banks could see the island nation added to the list of euro zone bailouts.
Cyprus
'
political party leaders meet Friday, seeking to hammer out an emergency
austerity package to ease market fears that an escalating economic crisis and
exposure to Greek banks could see the island nation added to the list of euro
zone bailouts.
Heads of
Cyprus
' six
main political parties gathered for a meeting at the Presidential palace at
0800 GMT in
Nicosia
and
are expected to pass a raft of measures to curb public spending and ease
pressure on
Cyprus
' 5.1%
budget deficit. The negotiations appeared to be characterized by broad
agreement, but local media reported Friday that bi-partisan consensus had
frayed after opposition lawmakers criticized the ruling center-left party's
refusal to enact sweeping structural reforms.
Euro-zone leaders' sweeping EUR109 billion ($157 billion) bailout for Greece
and new steps to prevent its debt crisis infecting the Continent may have given
the markets some respite, but investors will be watching Cyprus' meetings
closely.
Cypriot policy makers are grappling with an intensifying economic crisis
aggravated by a deadly July 11 explosion that shuttered the island's main power
plant and spawned almost two weeks of rolling electricity blackouts at the
height of the tourism season. The disaster, which resulted in 13 deaths, has
spurred a political crisis, prompting calls for President Christofias to
resign. The foreign and defence ministers have quit after a confiscated cache
of Iranian weapons exploded at a naval base, knocking out the 830-megawatt
Vassiliko power plant.
But the impact is also being felt across the economy: power outages have curbed
productivity as businesses and families have gone without electricity and air
conditioning amid a mid-summer heatwave. Although Cyprus' public finances are
in significantly better shape than the bailed out economies of Greece, Ireland
and Portugal, the cost of repairing the electricity grid, which is forecast at
EUR1 billion, or 5.6% of gross domestic product, will significantly deteriorate
the island's fiscal position.
Cypriot central bank Governor Athanasios Orphanides warned this week in a
leaked letter to President Demetris Christofias that the explosion had plunged
the economy into a "state of emergency, comparable to that of 1974,"
which could force the island to seek a bailout from
Brussels
.
Turkish troops invaded the island in 1974 and have since occupied one-third of
its territory.
Cyprus
is
divided between Greek-Cypriot and Turkish-Cypriot sectors.
The crisis has aggravated
Cyprus
'
existing economic difficulties; bond yields have been rising sharply in recent
months, underlining investor concerns about the financial and commercial
sectors' high exposure to
Greece
.
Analysts said politicians needed to deliver a sweeping reform package if
Cyprus
was
to restore market confidence and ease mounting public discontent.
"My understanding is that measures will be taken and that will be welcome
- but I'm not sure they will be tough enough to take us out of this crisis… we
really need a paradigm shift, shrinking the public sector if we are to get
through," said Andreas Theophanous, Professor of political science at the
University of Nicosia.
Ratings agencies have indicated in recent months that policy makers need to
take serious action to mitigate exposure to Greek debt.
In May, Moody's Investor Services put
Cyprus
'
investment-grade ratings on review for a possible downgrade, citing the banking
sector's large exposure to Greek debt and significant lending to that nation's
private sector.
The credit-ratings company has the economy's ratings at A2 - five notches above
junk territory - following a two-notch downgrade in February. Moody's said it
will consider the potential bank support package that Cyprus may need to extend
if Greek sovereign debt is restructured, as well as other possible sources of
assistance such as the European Central Bank.
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