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Greece Debt Crisis Worsens, Cyprus Affected - Stavrakis

greek debt crisisGreece is on the verge of financial disaster and of defaulting on its sovereign debt, and Cyprus is being affected, said Finance Minister Charilaos Stavrakis.

"Things in Greece are indeed serious...it has definitely affected Cyprus as well. We are a small country and most importantly, we have a banking system which has invested heavily in Greek bonds," said Stavrakis in comments after returning from a Eurogroup meeting on Greece's emergency.

The ministry of finance's position is that the Cypriot banking system is sound and has a strong capital base. The liquidity in the system is satisfactory and in April there was a significant increase in foreign deposits, said the minister. The government remains "committed to the effort towards further fiscal consolidation to achieve a deficit below 4.5 percent (of GDP) and stabilise public debt," he said.

The minister also aims to solve major structural problems in the state payroll and pensions. Reductions in public employee wages are not on the cards, but there will be no raises in the next two years. Stavrakis said that the government is considering ways in which the wealthy and companies can contribute, but nothing has been decided yet. Solutions have to be found in the next few days to strengthen the economy against very significant external risks, he said.

According to Fitch ratings agency, which recently downgraded Cyprus' economy on the basis that it is over-exposed to Greek national debt, roughly one third of the banking system's assets are booked as Greek exposure, including that of Greek subsidiaries based in Cyprus.

This exposure includes almost EUR14bn of Greek sovereign bonds and an estimated EUR5bn of Greek bank bonds, said Fitch.

In addition, Cypriot-owned banks have lent through their substantial networks in Greece significant amounts to Greek companies and households, said the agency.

If Greece does not receive the latest installment of a 110 billion euro bailout from the IMF and EU, it will default on its payments, including state employee wages. Yesterday, Greek Prime Minister George Papandreou held an emergency meeting with President Karolos Papoulias on the debt crisis. He later announced that he will form a new government and seek a renewed vote of confidence from the Hellenic Parliament. Most observers say that he is considering a power-sharing agreement with the opposition.

But there is an overwhelming tide of negative public opinion threatening to swamp the government, and main opposition New Democracy party leader Antonis Samaras called for new elections amid clashes between Greek protestors and riot police. Over the last three weeks, hundreds of thousands of protestors have camped outside the parliament building, angry at the government's ongoing austerity measures and the fact that over 800,000 people are unemployed.

Ecofin and the Eurogroup are set to meet again to discuss Greece's debt crisis next Monday, June 20th.

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