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Looking for way out before ratings

23/07/2010 08:53
The Finance Ministry is looking for political solutions against the increasing fiscal problems in the middle of the summer, under the close supervision of the foreign credit rating firms. Finance Minister, Charilaos Stavrakis announced yesterday the start of a new round of talks with the parties in order to find new measures that will cut deficit by 4.25% in 2011 and below 3% in 2012.

The prospects for the creation of majority party alliances, however, are still restricted since DIKO and DISY reject solutions that increase the taxes on businesses and – less – on households and insist on the need to reduce expenses.

At the same time, AKEL believes that any tax solutions that exclude businesses are unfair, while the President of the Republic seems not to have asked by the trade unions to freeze the surcharges of the public employees.

On Monday, Finance Minister, Charilaos Stavrakis said that it is too early to talk about a Plan B since there are three pending legislative measures for the targeting of the benefits, the elimination of tax evasion and the urban planning amnesty.

The numbers

The three bills, however, are expected to reduce deficit by only €60 million, while the remaining €240 million must be covered by other measures in order to achieve the fiscal target of 4.25% that the EU set for 2011.

The €30 million from the total €240 million will emerge from the imposition of increased consumer taxes on fuel for 2011 instead of the 6.6 months of 2010.

Some more €35 million will stem from the imposition of VAT on food and medicine.

The Ministry hopes that it will save €50 million from the non-recurring measures for the support of the hotel industry.

The big question for the Ministry is the growth rate of 2010 and 2011. In case that recovery is beyond expectations, the boost in the revenues can be such that could automatically reduce the fiscal deficit to the desirable levels.

S&P

The credit rating firms are not convinced by the recovery scenarios and demanded a message of political will to reduce deficit.

The four-month deadline that Standard and Poor’s (creditwatch negative) gave aims at the specification of the intentions of Cyprus’s political leadership.

S&P worry that although deficit stood at 6.1% in 2009, the government did not manage to achieve the necessary assent in the Parliament for the approval of the fiscal consolidation measures.

In its report, the firm referred many times to the failure of the two governmental proposals for the increase the corporate and property tax.

The Ministry hopes that the summer meetings with the parties will create the proper climate to find the necessary solutions when the Parliament opens in autumn. However, if no unity is achieved, the time margins will get narrower since S&P are expected to decide whether they will change the island’s rating until November.

In the meantime, Moody’s will announce its own intentions. The third firm, Fitch, kept Cyprus’s rating stable.