S&P's Creditwatch on Cyprus on Unsustainable Fiscal Position
"We believe the fiscal position of the Cypriot government is no longer sustainable. Due to the departure of the junior coalition party, DIKO, the Cypriot government is, in our opinion, in a weaker position to pass emergency budgetary measures through parliament," said S&P's.
The ratings agency said it is uncertain whether a new pacakage of austerity meausres will be extensive or efficient enough.
"In particular we question whether, without more extensive expenditure cuts including to public sector payrolls, the government can meet next year's ambitious 2.5% of GDP general government deficit target," said S&P's.
The creditwatch will be in effect until S&P's assesses the government's ability to address economic challenges and as details of a planned bond exchange of Greek sovereign debt become clearer.
"Should the parliament approve of a credible budgetary consolidation package consistent with the 2012 general government deficit target of 2.5% of GDP before month-end, and if potential losses associated with the restructuring plans of Greek sovereign debt remain at current anticipated levels, we could affirm our 'BBB+' long-term foreign currency and 'A-2' short-term ratings on Cyprus," said the ratings agency.
Yesterday, the latest statistics on government spending for the first six months of the year showed a rise in the deficit to 626 million euros, up from 430 million in 2010.