Friday, 5 August 2011

For those that speak german: My interview as part of an excellent and optimistic article in Die Welt.

I am so glad to see this well balanced article that has contribution by me and the fellow blogger economist that I admire, Professor Panikos Demetriades. The link here is in German - you can get a poor translation of it in google translate.

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A single party government will lead us to Greek style trouble

Having been a resident of this island for 20 years, I am still amazed by the narrow mindedness of political priorities in Cyprus.

There is no doubt that we were facing very difficult economic times even before the explosion of Mari. The governor of the Central Bank of Cyprus, (who has not been invited by the government to suggest any plan for the economy) has openly warned that the economy after the Mari explosion is facing the largest national emergency since 1974. The explosion's effects have led to a further downgrade of our economy and our major banks by credit rating agencies, making public borrowing in the international market prohibitively expensive.

The opinion of the credit rating agencies matters as it directly affects at what interest rate the Cyprus Government can borrow. The rule of the thumb is that an interest rate of above 6% Medium terms borrowing is unsustainable, as the very high interest payments will force governments to default rather than introduce incredibly harsh budget cuts.

Back in December I warned that despite repeated downgrades “There is not a feeling that we are on a slippery slope.” The inaction in taking the type of measures that would calm international investors and rating agencies is now hurting us tremendously as the government has very substantial debt to roll over over the next 3 years, and it will have to do so at substantially higher interest rates.

So the next 3 years the Cyprus government will be called to find the money to pay more interest payments in order to renew its existing debt, as well as borrowing more due to Mari and the reduction of revenues that the explosion has caused to our economy. Only very brave and immediate drastic actions to tackle to budget deficit might convince foreign agencies of the will to avoid default in 2-3 years time.

Yet despite the increasingly anxious calls for action, politicians still behave irresponsibly, by mixing political priorities along with measures to prevent a economic meltdown. The fact that it took more than a week to form a government, is very bad news for our credit rating agencies, who want to see quick and decisive politicians who agree on the steps that needed to be taken (especially in regards to supporting our banks and in reducing the size and borrowing needs of government).

DHKO decided to push concessions out of the president on the Cyprus issue at a time of a national economic crisis, delaying the appointment of a government for a whole week. Other parties did not want to join the floundering ship of the president's government. Most irresponsibly of all, the president decided to go ahead and have a one party government.

This one party government is a totally irresponsible act. This government will not be able to pass the budget for 2012 through a hostile parliament, which means that we are set for even more inaction and political wrangling in October. All of this will lead to further downgrades of our economy, making borrowing prohibitive and a default / EU support more likely.

The economy is at a crisis point, and all political parties need to work together to tackle the looming dangers that are just around the corner...

---------------------------------------------------------------------------------------------------Licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. . You are free to copy content but you must link back to this blog and attribute the work to me (Alexandros Apostolides).. You cannot use my work for commercial purposes and you must share it under the same terms I do.