AS EU finance ministers began converging on the island for crucial debt crisis talks, fresh details emerged of a 20-page draft calling for sweeping changes to Cyprus’ imploding pensions system, privatisation of certain semi-governmental organisations, tighter budgetary controls in the broader public sector and labour market reform.
Last night President Demetris Christofias met briefly with IMF Managing Director Christine Lagarde, here attending the Eurogroup and the informal economic and financial affairs council (ECOFIN) taking place today and tomorrow.
Speaking after the meeting Christofias said Lagarde listened “with understanding” to the government’s views on the terms of a bailout.
Asked when Cyprus would sign a bailout deal, Christofias said: “When we are ready.”
Meanwhile, web-based ‘InBusinessNews’ yesterday published a follow-up on the troika’s proposed austerity measures for Cyprus, whose overriding objective is to slash the public deficit to 4 per cent of GDP by the end of this year, and to 2.5 per cent by 2013, enabling the island to balance its books by 2015.
The draft was submitted to the government late July at the end of the troika’s second fact-finding mission here.
It proposes pension reform that would bring civil servants’ retirement plans in line with those of the private sector, and cuts to those pensions that are above the national average.
On the banks – the immediate cause behind Cyprus’ request for a bailout – the troika proposes that all financial institutions on the island should come under a single supervisory body and be subject to the same regulations. Currently, cooperatives fall under the ‘umbrella’ of the Commerce Ministry, not the Central Bank.
The troika calls for legislation enabling banks to sell property held as collateral against loans deemed non-performing for a maximum period of one-and-a-half years.
It also wants to alter the definition of non-performing loans (NPLs) so that it includes loans that have not been serviced in 90 days but are fully secure. Currently, Cyprus banks do not count these as NPLs. Recalculating NPLs could significantly increase the bailout amount needed by the banks.
International lenders also call for a due diligence report covering up to 75 per cent of the total assets held by Cypriot banks, as well as periodic stress tests.
And in a bid to buttress banks’ capital adequacy, the troika proposes raising the Core Tier 1 capital ratio from 8 per cent currently to 10 per cent by the end of next year.
The document leaves almost no stone unturned, zeroing in on the social security fund (SSF) among others. It calls for a new actuarial study into the viability of the fund, raising retirement age and linking this to life expectancy, and for civil servants to pay into the SSF.
Moreover the leaked draft calls for the enactment of legislation making the balancing of budgets mandatory, the establishment of an independent body to administer the public debt, and the complete privatisation of some SGOs such as Cyprus Airways and partial privatisation of others like the Cyprus Telecommunications Authority.
It further advocates scrapping wage indexation in the private sector as well as in the public sector, altering the method used to calculate the minimum wage, and opening up so-called ‘closed’ professions such as law, engineering, architecture and real estate.
In the health sector, Cyprus’ international lenders propose enhanced controls to minimise wasteful expenditures, and an increase in contributions by those eligible for public health care.
A mix of spending cuts and revenue raising, the measures include, but are not limited to: a 15 per cent cut in the state payroll by 2013; scrapping of 13th salaries in the public sector; cutting 13th pensions of between €1,000 and €1,500 by 50 per cent, and those over €1,500 by 75 per cent; taxing allowances in the public sector; extending a wage freeze until the end of 2015; a rise in taxes of tobacco, cigarettes, alcohol and fuel; an across-the-board downsizing of the civil service; and abolishing the heating fuel allowance and reducing other allowances such as the Easter and Christmas bonuses.
A new round of consultations is expected to take place between the government and the troika later this month or October.
The austerity measures were leaked to the media amid mounting criticism that the administration is delaying the bailout request process for fear of the public backlash. The government has been avoiding having to touch the public sector, especially with national elections looming next February.
Today Christofias will be receiving Jean-Claude Juncker, President of the group of eurozone Finance Ministers, and later Mario Draghi, President of the European Central Bank. Tomorrow he meets with European Economic and Monetary Affairs Commissioner Olli Rehn.
In Nicosia EU finance ministers will have their first chance to discuss the ECB’s new bond-buying programme and the outcome of a German court ruling on the eurozone's permanent bailout fund.
They will also discuss Spain and whether it will make a formal request for assistance beyond aid for its banks, Cyprus' need for help, and how Greece, Portugal and Ireland are faring in meeting their bailout obligations.
President Demetris Christofias greets IMF chief Christine Lagarde at the Presidential Palace last night