By George Psyllides
CYPRUS was on the brink of bankruptcy early in April this year, Finance Minister Harris Georgiades told parliament on Thursday, but the danger has now passed and a challenging austerity plan imposed by international lenders was starting to yield results.
Submitting the 2014 budget to parliament, the minister said that on his first day in office, at the beginning of April, he was told that state coffers would be empty after paying the month’s salaries.
This was shortly after Cyprus agreed to a €10 billion bailout that came with painful terms for its banking system.
“This was the condition of the public finances,” Georgiades said, urging those who disagreed to take note.
From the first moment the government’s priority was to avert the “terrible danger” of full economic collapse, and eurozone exit, he said.
“That great danger has passed,” the minister said, adding that that was the view of international observers.
“We are implementing … a difficult and demanding programme, which has already started to yield results. We have consecutive positive evaluations and recently we also had the first ratings upgrade in three years,” Georgiades said.
The state’s finances were in crisis a lot earlier, Georgiades said.
Cyprus had lost access to international markets in May 2011, but the previous administration only – begrudgingly — sought a bailout two years later, and that was after spending a €2.5 billion loan from Russia.
The minister once more gave an overview of the unsustainable policy followed over the years.
“Public spending increased at a higher rate than the rate of economic growth. The public payroll rose at an even higher rate,” he said.
Cyprus’ public debt was €8.4 billion in 2008, when Demetris Christofias came to power, climbing to €15.4 billion at the end of 2012.
The rise included €1.8 billion in assistance to Laiki Bank, which collapsed less than a year later.
The banking sector also had problems, the minister said, mainly because of the “reckless and unsustainable” credit expansion of the previous decade in Greece and Cyprus.
“A credit expansion that unfortunately financed consumption, primarily, and the equally reckless expansion in the real estate sector,” Georgiades said.
Under the terms of the bailout, Cyprus had to close Laiki and recapitalise its biggest bank, the Bank of Cyprus, by seizing depositors’ cash.
The government intends to pare spending next year by 10 per cent. Lawmakers will discuss the budget in a two-day session on December 18 and 19.
Georgiades, who was submitting the first budget of the Nicos Anastasiades administration, said Cyprus needed to be fiscally prudent in coming years.
“We received €10 billion, absorbing until now about half that amount and we have to make sure we are responsible until we manage to regain access to the markets, until we can stand on our own two feet,” he said. “That won’t happen if we follow the illogical policies which got us here in the first place.”
Lenders expect a deep recession, with output contracting by 7.7 per cent this year and 4.4 per cent next year. But Georgiades said the island’s economy was proving more resilient than initially expected.
“Basic sectors have not lost their momentum and new sectors, such as energy, are being pursued in a decisive manner,” he said.
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