Cyprus' exposure to Greece is 'weak link' in economy, says IMF
17:52 Cyprus must take immediate steps to start reducing public debt and its banks remain badly exposed to debt-crippled Greece, the International Monetary Fund warned today.
Externally, the exposure of Cypriot banks to Greece and worsening prospects for external demand pose the main challenges to its struggling economy, the Fund said in its 2011 staff report.
Domestically, the foremost challenge is to restore sound public finances, and to regain access to sovereign debt markets, it said.
"The situation calls for immediate action to reverse the widening fiscal deficits and put public debt on a downward path," it said.
The IMF said banking assets totaled 152 billion euros, or 835 percent of GDP, while assets of Cypriot banks were 500 per cent of GDP.
Cypriot bank exposure to Greece, including both sovereign debt and to Greek residents, totaled 29 billion euros, or 160 percent of Cypriot GDP.
Cyprus's two dominant banks have sizeable holdings in Greek debt. Preliminary assessments by the European Banking Authority suggest a 3.6 billion euro capital boost to provide them with adequate buffer, although, according to the Cypriot Central Bank, the final figure is likely to be much less.
Cypriot authorities needed to strengthen crisis management procedures and engage in contingency planning, including the passage of legislation to give authorities powers to provide financial support through a fast-track procedure, the IMF said. An IMF technical assistance team was in Cyprus to advise on legislation in late October, it said.
On the policy front, measures should primarily focus on expenditure reductions. Priority areas for fiscal savings included containment of public sector wages; at 15.4 percent of GDP, Cyprus had the highest public sector wage bill in the euro zone, the IMF said.
There were concerns earlier this year that Cyprus would have to ask for external aid due to a munitions blast which knocked out its largest power plant, although a loan from Russia has eased its immediate financing issues.
Cypriot authorities are negotiating a two-year freeze on pay in the broad public sector and an additional tax on earnings in the private sector from 2012.
Staff projected an economic contraction of 1 percent in 2012. The main driver behind the expected downturn included even tighter financial conditions as banks curtailed their lending in order to preserve capital and liquidity buffers and the negative short-term impact of fiscal adjustment measures, the IMF said.
A worsening growth outlook in the euro area and beyond was also weighing on prospects, it said.
(Source: Cyprus Mail)
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