Fitch cut Cyprus’ credit rating by two notches to BBB on Wednesday due to fiscal slippages, saying the island state was likely to require a bailout to meet its funding needs.
“The two-notch downgrade of Cyprus’s ratings to ‘BBB’ reflects the actual and anticipated fiscal slippage, compounded by Fitch’s expectation that the sovereign will be unable to access the international debt markets in order to refinance an increasing debt maturity profile in H211 and H112,” Fitch said in a statement.
The other two main rating agencies, Standard & Poor’s and Moody’s, both cut the island’s rating at the end of July. Moody’s rates Cyprus Baa1, Standard and Poor’s BBB-plus.
AUSTERITY PACKAGE FOR CYPRUS TOO
In the meantime the government and civil service unions rubber stamped a number of measures concerning the public sector that will be part of an austerity package expected to be sent to parliament late yesterday.
Shortly after the measures were announced, DIKO vice chairman Nicolas Papadopoulos said his party – which abandoned the coalition only last week – could not be expected to support the package.
“What we agreed was for a specific contribution on pensions, which everyone says is a time-bomb but it seems some don’t want to do anything to prevent the explosion,” Papadopoulos explained.
He said that his party would either try to amend the bills or reject them at the parliament.
“The only certain thing is that measures agreed at the Presidential Palace will not be implemented,” Papadopoulos said.
Government Spokesman Stefanos Stefanou told reporters after the meeting: “Included in the agreement are substantive structural changes to rationalise public finances. At the same time the government will continue the dialogue for additional measures related to the situation created after the deadly Mari blast.”
The measures provide for a ten per cent cut in the pay scales for newcomers in the broader state sector, including newcomers in the social insurance pension fund and raising civil servants’ contributions to the widow and orphan fund to 2.0 per cent from 0.75 per cent.
The deal also provides for a 3.0 per cent per year contribution from every worker of the broader state sector for three years, and if necessary extend the measure further should problems continue. The measures are expected to save the state €22.5 million this year and €101.65 million in 2012.
Though not officially announced, the package is expected to include a 2.0 per cent rise in VAT on items that are already taxed at 15 per cent, which will bring the state an estimated €20 million this year and €130 million in 2012, more than the savings from the public service.
Reports said the package will also include a 5.0 per cent rise – from 10 to 15 per cent – on gains from interest rates. It is understood that this will only affect residents of Cyprus.
There will also be a 5.0 per cent raise in income tax – 30 to 35 per cent – on income over €60,000.
Glafcos Hadjipetrou, the leader of PASYDY (the state workers umbrella union), speaking after the meeting with President Demetris Christofias said: “The measures we have accepted are very painful for workers. We have accepted making sacrifices to help tackle the economic crisis.”
But the measures that affect the public sector appear to fall short of what parties expected, setting the scene for a showdown in parliament where the government does not have a majority.
In particular, the package does not include a 4.0 per cent contribution by current state workers towards their government pension, which parties say was included in earlier measures discussed in July.
Theoretically, opposition parties could amend the package and pass the 4.0 per cent contribution, something which will most certainly prompt reaction.
DIKO’s Papadopoulos said his party had the good will to enter a constructive dialogue but “what we are not prepared to do is tax people so that increased spending in the public sector continues.”
Papadopoulos said the government should cut spending first and then discuss any additional taxes.
Source: Cyprus Mail
