Standard and Poor’s ratings agency yesterday put the Cypriot government on credit watch with negative implications in reaction to parliament’s rejection of two proposals to reduce public debt.
“Standard and Poor’s ratings services placed its ‘A+’ long-term sovereign credit ratings on the Republic of Cyprus on credit watch with negative implications,” the international ratings agency said.
“The credit watch placement follows the legislative branch’s rejection on July 9, of two of the government’s proposals for raising revenues,” S&P credit analyst Trevor Cullinan explained.
A majority of MPs rejected a government proposal to increase corporation tax by one percentage point to 11 per cent and to increase a levy on large property holdings that would have generated annual revenues of €90 million.
Parliament said the government had to cut its own bloated payroll before seeking to raise taxes.
“We query whether the government will be able to push through fiscal consolidation measures that are sufficient to address the significant deterioration in public finances,” the ratings agency added.
Cyprus must reduce it fiscal deficit from six per cent of GDP to below the EU-ceiling of three per cent by 2012, which means it needs to reduce the deficit by around €500 million in two years.
It is already under strict EU monitoring for exceeding the deficit rules.
Finance Minister Charilaos Stavrakis had warned MPs on Tuesday that rejecting government revenue raising measures would get it into hot water with Brussels and the rating agencies.
Nicosia plans to slash 700 public sector jobs this year and seeks to save €140 million in ministry spending cuts, while ministers and MPs have taken a 10 per cent pay cut.
Meanwhile, France and Germany want faster procedures against EU states with excessive budget deficits and to impose financial sanctions on them, the French finance minister said yesterday.
Christine Lagarde made the comment after her German counterpart Wolfgang Schaeuble attended a French cabinet meeting in Paris.
European governments agreed last week to create tough new sanctions against countries that run excessive public deficits, including a halt of certain subsidies. In Budapest, a leading official from the ruling centre-right Fidesz party said yesterday the International Monetary Fund should be “more realistic” in its demands for Hungary to bring down its deficit.
“The IMF should be realistic in its expectations for a deficit ratio of 2.8 percent in 2011,” the deputy chairman of Fidesz, Lajos Kosa, told public television.
“The last time Hungary had such a low deficit was between 1998 and 2002 under the last Orban government when the economy was in much better shape,” Kosa said.
Fidesz is the party of Prime Minister Viktor Orban, who swept to victory in elections in April.