Central Bank Governor Welcomes Consensus On Austerity

Central Bank Governor Athanasios Orphanides has welcomed a broad political consensus on new austerity measures to keep Cyprus out of the European Financial Stability Facility (EFSF).

During a speech to the Parliamentary Committee for Finance, he warned that the Cypriot economy is showing marked signs of recession after the third quarter showed negative growth. In other comments, he said that the general government deficit is set to be 6.7 percent of GDP, significantly higher than the already problematic deficits in the last two years.

"The most important consequence of fiscal deterioration of recent years is the loss of our credibility as a state, so that we have been completely excluded from international markets as of May 2011," said Orphanides.

Cyprus bond yields are skyrocketing, sadly reflecting the concern of international investors over the Republic's creditworthiness, which compromises the role of Cyprus as a financial centre, he said.

"It is crucial for our country to immediately reverse this picture. Is it possible for foreign investors to trust us with their funds when they see that we cannot properly manage our own?" asked the Central Bank Governor.

The loss of market confidence in a state puts the banking system under tremendous pressure, he said.

"I am very positive that the critical situation has been recognised. The government and political parties have publicly acknowledged the need to reduce public spending, including the freezing of the state payroll for two years," said Orphanides.

After the measures are passed through Parliament, the market reaction should be closely monitored in the hopes that the political consensus can restore investor confidence, said Orphanides.

The new package agreed between President Demetris Christofias and political parties includes:

-Freezing Cost of Living Allowance (CoLA) and state employee salaries for two years.
-A temporary contribution from private employees who earn more than 2,500 euros per month that will be shared equally by the employee and employer.
-A rise in tax on dividends from 17 percent to 20 percent.
-Reviewing property taxes.
-Passing a bill raising VAT from 15 to 17 percent.
-Savings from social benefits of 200 million euros.
-Combating tax evasion by taxing loans taken by directors of companies and their families, and by withholding salaries for which no regular contributions were made to the Social Insurance Fund.
-Reviewing various financial allowances in the public sector with a view to removing or modifying them.
-Taking steps to support growth such as strengthening small and medium enterprises in cooperation with the European Investment Bank.
-Provide tax incentives for investing profits in development projects and automation.
-Establishing a committee with the Ministry of Finance and political parties related to reducing the operating costs of the public sector and reviewing the contribution from wealthy individuals.

The measures are expected to be voted on in the House of Representatives on December 15th.

To make and read comments, become a full member of your news community, click here.