ECONOMY

Nicosia seeks to avert harsh bailout terms

Cyprus is seeking to avert harsh measures EU officials want to impose in exchange for financial assistance to bail out its beleaguered economy and negotiate a milder form of austerity, Finance Minister Vassos Shiarly said on Tuesday.

In talks with European Commission, European Central Bank and International Monetary Fund officials — known as the troika — Shiarly said the distance on some issues is «considerable and needs to be bridged,» while there is a «common understanding of the problems» on others.

“What is certain,» he said in an interview with the official Cyprus News Agency, «is the two sides have full knowledge of the issues under discussion; there is a momentum to bridge them.”

The troika has just wrapped up a second visit to Cyprus since the eurozone member applied for an EU bailout in June.

It has been widely reported that its proposed remedy is tougher than the «mild» measures the government wants introduced over a longer period of time.

Cyprus hopes a deal can be reached in September even if the full extent of funding needed to prop-up a Greek-exposed banking system and recession-hit economy has yet to be decided.

The troika reportedly aims to wipe off one billion euros in government expenditure through slashing the state payroll by 15 percent, shaving 10 percent off welfare benefits, reforming or scrapping the inflation-linked cost-of-living allowance and rolling back government-subsidised housing finance.

It also is thought to want an unspecified increase in revenues through privatising semi-governmental bodies and hiking value-added tax. The top rate of VAT was raised from 15 percent to 17 percent in March, and speculation is the troika is aiming at 20 percent.

“Based on the experience of Portugal and Spain, we believe the troika expects public expenditure reduction to include the public wage bill, as well as increasing taxation,» said Shiarly.

“However the combination and weight (of these measures) will be determined by Cyprus and not by the troika.”

He said «the troika proposals are not one-sided; rather they are a combination of tax increases (and public expenditure reduction) on the sectors with the least negative impact on the economy.”

Shiarly said the troika delegation will visit the island again in September.

On Monday, President Dimitris Christofias said the government does not believe the troika has come to impose its own terms. «It is here to have a dialogue with us; we have our own arguments to put forward,» he added. «We cannot have anybody arriving in Cyprus to tell us what the economic situation is. We may have a different assessment … and of how problems will be resolved.”

Christofias has told Brussels that one-way austerity is a proven failure and that stimulating growth is the only exit out of a crisis.

The government fears that imposing harsh measures will trigger social and industrial unrest that will only compound current economic woes.

Some forecasts suggest measures of this order could see the economy shrink by an unprecedented three percent, at best.

Finance ministry forecasts before the bailout was sought put growth this year at a negative 0.5 percent, with a positive figure of the same amount for 2013.

Authorities have declined to say how much the 17-billion-euro economy actually needs to remain solvent, but credit ratings agency Standard