Cyprus: reaching 2012 deficit target a must

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By MENELAOS HADJICOSTIS, Associated Press

NICOSIA, Cyprus (AP) — Cyprus must stick to its deficit target of 2.5 percent of GDP this year to convince international investors that it can survive the European financial turmoil, the island's new finance minister said Thursday.

Vassos Shiarly said the government is ready to take any additional austerity measures that may be required to meet the target and eliminate "uncertainty" over its commitment to fiscal discipline.

Cyprus, a member of the 17-country eurozone, is relying on a €2.5 billion ($3.29 billion) low-interest loan from Russia to see it through this year. A string of credit rating downgrades — due mainly to its large banking system's exposure to Greek debt — caused its borrowing rates to jump in international markets.

The ensuing economic slowdown has seen unemployment shoot up to 9.5 percent, a staggering rise for a country that for many years has had a 4 percent jobless rate.

The government ushered in austerity measures last December, including a two-year public sector wage freeze and a sales tax hike, to tackle the deficit that had climbed to 6 percent last year.

"The international markets are closed to us, so this fiscal discipline becomes even more pressing," Shiarly told reporters after meeting with officials to discuss the government's four-year financial stability program.

"So long as we are unable to borrow from international markets, we must remain within the framework that we have agreed."

Shiarly said under the program, the deficit is forecast to shrink to 0.5 percent next year with the budget being balanced in 2014 and 2015.

According to preliminary Finance Ministry projections, the economy is expected to contract by half a percentage point this year, but will marginally grow by 0.5 percent in 2013.

The island's debt as a proportion of its gross domestic product is projected to grow in 2012 by half a percentage point over the previous year to 72.1 percent, before dropping to 70.2 percent in 2013.

Central Bank Governor and European Central Bank Governing Board member Athanasios Orphanides said the government's deficit-fighting strategy is designed to pull the island out of the "vicious circle" of the banking system's Greek exposure driving the island's credit rating downgrades, which in turn are pushing Cyprus to take up more Greek bonds.

"We know what the problems are and...I completely agree with the finance ministry's ambitious program that strives to eliminate the fiscal deficit so that...the state's fiscal discipline and credibility is restored," said Orphanides.

Shiarly said schemes geared toward spurring growth will be enacted once Cypriot banks can complete their recapitalization plans.

The island's two largest banks, the Bank of Cyprus and Cyprus Popular Bank, posted record losses for 2011 as a result of writedowns on their Greek government bond holdings.

Hardest-hit Cyprus Popular Bank is looking for strategic investors to raise €1.35 billion ($1.78 billion) that it needs to meet the EU's new capital buffers requirements by July 1.

Shiarly repeated that the government is ready to step in and support the banks as a last resort.

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