Cyprus FinMin: More austerity or EU bailout sure

November 18, 2011 - 10:50 AM

NICOSIA, Cyprus (AP) — Cyprus will almost certainly need a bailout from its eurozone partners if tougher spending cuts and tax hikes aren't taken right now, the country's finance minister said on Friday.

Kikis Kazamias says his ministry is looking to freeze government workers' salaries for two years and save a total euro355 million ($479 million) as part of an approach to prevent the country from joining Greece, Ireland and Portugal in seeking a bailout — it's already getting a cheap loan from Russia to see it through the coming months.

He also wants to introduce a scaled surtax on private sector salaries above euro2,500 and an additional levy of 0.5 percent on domestic company turnover.

The new proposed measures are on top of a euro840 million ($1.1 billion) austerity package included in the 2012 draft budget that aims to shrink the deficit from its current 6.5 percent of gross domestic product.

Cyprus has pledged to the EU to cut its deficit to under 3 percent next year and to balance its budget by 2013, but could miss those targets without additional measures as it's economy gets buffeted by the slowdown in Europe. Kazamias said the balanced budget target has been pushed back a year to 2014.

The EU's Monetary Affairs Olli Rehn warned Cyprus earlier this month that it risks sanctions under new EU spending rules if it doesn't take additional measures to get its budget under control.

Kazamias said Cyprus could face a fine of euro36 million ($48.5 million) — equal to 0.2 percent of its GDP — if it doesn't take those measures by mid-December when the rules come into effect.

The bloated civil service takes up around a third of all government spending, but powerful trade unions strongly oppose any move to curtail salaries, insisting that taxing the rich must come first.

But Kazamias said Cyprus — whose economy is projected to hover around zero over the next two years — can no longer afford to kick the can down the road on tough economic decisions either because they'll either rankle with special interest groups or carry a political cost.

"This can't go on anymore. We are obligated to take decisions centered on reform that will shore up our public finances, improve the image of our economy and raise hopes for a better future," he said.

Opposition parties which have a majority in the country's parliament have said they would back tougher measures.

Kazamias said the country needs to restore its credibility so that international markets can loan it money at lower interest rates.

A string of downgrades by all three major international ratings agencies in recent months mainly due to Cypriot banks' large Greek exposure have brought the island's rating down to near-junk status.

As a result, high interest rates on Cypriot bonds have made it increasingly costly for the government to borrow from the markets to service its debt and cover costs.

Cyprus has turn to Russia for a 4½-year, euro2.5 billion ($3.4 billion) loan at a 4.5 percent annual interest rate, which is much lower than markets are currently offering.

Kazamias said the country is able cover its financing needs for next year.