CYPRUS may expect further sovereign credit rating cuts in the future as the lack of tangible signs of progress in negotiations over possible fiscal consolidation measures causes uncertainty, according to economist Alexandros Apostolides.
“Markets are afraid of uncertainty. As long as things are being discussed and problems are not solved, things get worst,” said Apostolides who teaches economics at the European University of Cyprus. “If we do not take dynamic action now we will face more downgrades.”
Standard & Poor’s Ratings Services downgrading of Cyprus from ‘A+’ to ‘A’ on November 16 indicates that Cyprus is now in the “first phase of a probation period” and must therefore demonstrate better fiscal conduct, Apostolides said. “The government’s focus should therefore be on emphasising to the markets that they are willing to take all the bold actions required to tackle the financial problems of Cyprus in the area of the budget.”
Getting a country’s record clean again is hard once it has been punished with a downgrade of its credit rating, he said. “It is much easier to be kept downgraded than to be reinstated as a prime financial security.”
Apostolides’ warning comes as the government coalition is yet to take final decisions on the 2011 budget. A fiscal consolidation package to cut the deficit by 150 million euros to 4.5 per cent of gross domestic product is still a major cause of friction within the coalition. Communist party AKEL insists on introducing a bank tax, while minor coalition partner DIKO argues in favour of spending cuts.
The meeting of the two coalition partners on Friday afternoon, the first after S&P’s rating cut, with minister of finance Charilaos Stavrakis to discuss fiscal consolidation measures he proposed six days ago, failed to reach any final decisions.
Just the discussion of “whether banks are taxed or not, also creates uncertainty and uncertainty makes markets nervous,” Apostolides said. In addition, the economy may be caught in a vicious circle as “in the light of the downgrade and the expected increase of external borrowing cost, the government needs to further reduce expenditure, more than it planned for in the forthcoming budget”.
The implementation of the government’s proposal to tax banks based either on their assets or liabilities or profit may also create another vicious circle. Such taxation may weaken the soundness of the financial sector which served in recent years as the economy’s locomotive, according to Bernard Musyck, associate professor of economics at Frederick University. “The government risks damaging the economy if it undermines the banking sector by taxing,” he said.
Cyprus’ financial sector grew 4.9 per cent and was the most dynamic sector of the economy last year when the economy shrank 1.7 per cent. Standard & Poor’s justified its decision to downgrade Cyprus’ credit rating on the grounds of the size of the financial system’s size - seven times Cypriot GDP - and its exposure to Greek assets.
Already, the downgrade itself may serve as a signal of caution to depositors, according to Musyck. “It may directly affect the mood of potential and existing depositors that the banks could be contaminated by the problems affecting the financial sector in Greece.”
Sunday 21 November 2010
Credit rating cut may not be the last - Cyprus Mail
via cyprus-mail.com
