Cyprus said on Monday it was working on a new austerity package to stave off further credit ratings downgrades as its already high borrowing costs spiked at a sale of domestic bonds.
Scrambling to avoid becoming the fourth euro zone country to need bailing out, authorities on the Mediterranean island are putting together the outline of a new package to ensure that an existing one, panned by opposition parties as insufficient, gets approved by parliament, scheduled to convene on Aug. 25.
"The finance minister will offer an outline of the package on Wednesday," Christos Patsalides, permanent secretary at the ministry of finance, told a session of parliament's finance committee. He did not elaborate, but said the new proposals would be ready in legislative form in September.
Cyprus has seen its borrowing costs on international markets surge on the back of repeated downgrades by ratings agencies because of fiscal slippage and exposure of its banking sector to Greek debt.
Its central bank and the island's largest lender have warned the island could be heading for a bailout unless swift action is taken to address fiscal imbalances and structural problems in the tiny €17.4-billion ($24.7-billion) economy.
The government dismisses such scenarios, but its borrowing costs are steadily rising.
On Monday, authorities sold 10-year domestic bonds worth €23.1-million with a yield of 7.00 per cent, compared to 6.252 per cent at the sale of €53.55-million of bonds at an auction of similar paper in June.
The authorities have increasingly focused on local markets for borrowing requirements this year to counteract volatility on international markets. On Monday, a 10-year bond issued to international investors in Feb. 2010 was bid at over 11 per cent.
The existing proposals pending approval include a 2-point increase in VAT, a 3 per cent contribution from civil servants' salaries and additional tax for high earners. Over a two-year period they are designed to save some €750-million.
But opposition parties, which dominate Cyprus's 56-seat parliament, say the package falls well short of a unanimous set of measures agreed to with all political parties last month, and which the government subsequently altered.
Those suggestions had included closing some semi-government corporations, reducing starting salaries in the civil service and abolishing vacated positions, as well as changes in a now costly pension calculation system and better targeting of state benefits, finance committee chairman Nicholas Papadopoulos said.
"Unfortunately the same catastrophic policy of inaction and diffidence continues," said Mr. Papadopoulos, whose Democratic Party was a junior governing coalition partner before quitting the alliance on Aug. 3. "The measures are totally insufficient."
Cyprus has come into sharper market focus after an accidental blast destroyed the island's largest power station on July 11, triggering an energy crisis. Preliminary estimates now suggest the economy, one of the smallest in the euro zone, will remain stagnant this year from earlier estimates of 1.5 per cent growth.
The island's banks are sitting on an estimated €5-billion in Greek sovereign debt and its economy is heavily exposed to debt-laden Greece through trade.