OPPOSITION parties DISY and DIKO yesterday called for an emergency meeting of the House Finance Committee to discuss ways of keeping the island’s debt sustainable and avoid additional austerity.
The two parties, which support the candidacy of DISY chief Nicos Anastassiades in February’s presidential poll, said joint action was necessary to reverse the situation and create prospects for the Cypriot economy.
“If together we succeed in keeping the public debt at sustainable levels, then we will avoid taking additional painful measures and at the same time create better conditions for a faster recovery of the economy,” said Anastassiades’ spokesman Tasos Mitsopoulos.
Mitsopoulos said it was of the upmost urgency for the government and the Central Bank to finally put forward convincing arguments that would lead to the reduction of the amounts necessary to recapitalise the banks and cooperatives.
“The sustainability of Cyprus’ public debt must be our main concern at the moment if we honestly want to not burden Cypriot taxpayers with even more painful austerity measures and prevent the possibility of privatisations,” Mitsopoulos said.
Reports suggest the preliminary results of due diligence showed that banks will need €10.3 billion.
That’s on top of some €7.5 billion needed by the state.
The Central Bank wants to challenge this estimate, with the help of a foreign consultancy firm, in a bid to revise the figure downward - closer to €9 billion or lower.
If the total bailout amount reaches 100 per cent of the island’s GDP, or around €18 billion, it would mean a debt to GDP ratio of 140 per cent
That could spell trouble for Cyprus as the IMF considers any debt over 120 per cent unsustainable.
There are various options available to make a debt sustainable, including a write-down or haircut, similar to what the EU did in Greece.
A haircut however would do more harm to Cypriot banks.
“Most of Cyprus’ debt is held by banks, which needed the capital in the first place,” said Fiona Mullen, director of Sapienta Economics. “If a haircut is supposed to help Cyprus it does not look that it will under the circumstances.”
An alternative would be to extend the debt repayment period, Mullen said, and lower the interest rate.
A haircut would also affect provident funds that hold government debt, and force a reduction in pensions, according to economist Alexander Apostolides.
One solution would be to write-down the debt held by foreign entities if possible.
“I am not sure if we can make a distinction between internal and external debt,” Apostolides said.
One other option is for the banks to borrow directly from the European Stability Mechanism (ESM), thus removing the burden from the state.
However, some EU states, including Germany, oppose this because they do not want the ESM undertaking any so-called legacy debt - debt dating back to before the facility was established in October.