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Post-bailout overconfidence comes at a cost, economist says

While post-bailout Cyprus will no longer carry that stigma of being supervised and supported by others, it must avoid being overconfident and keep in mind that choosing policies that markets disapprove of will come at a cost, an academic economist said.

“The main benefit from exiting the programme is the removal of the stigma of a country that needs to be supervised and financially supported by others,” which only has a symbolic value and less tangible benefits, Sofronis Clerides, who teaches economics at the University of Cyprus, said in a telephone interview on Thursday. “Our sovereign rating is still below investment grade and markets continue to be reserved towards Cyprus. Therefore, Cyprus should be twice as prudent given that if something goes wrong now, it won’t have the safety buffer offered by the troika”.

parliamentClerides warned that “we cannot afford to be overconfident”.

Cyprus, with its highest sovereign rating set by Standard & Poor’s at BB-, which is three notches below investment grade, has to keep in mind that taking “decisions with which markets disagree, this will come at a cost in terms of higher interest rates when we borrow,” Clerides said.

Yields of the Cypriot 10-year government bond issued in October stood on Thursday at 4.01 per cent after rising as high as 4.09 per cent at the end of February and falling to as low as 3.70 per cent in mid-December, when opposition parties decided to reject a draft bill that would allow the government to establish CyTA Ltd. This bill which was one of the prior actions for the successful completion of the adjustment programme, would allow CyTA Ltd take over the operations and assets of the state-owned Telecommunications Authority of Cyprus, part of the privation plan agreed with international creditors.

“If our creditors believe that policy A is better than policy B and we decide in favour of policy B, we will pay for this and must be prepared to do so in that case,” Clerides said. “Rating agencies are watching what we are doing with Cyta, the ports, civil service reform, the non-performing loan problem, and so on. It is hard to know how much different decisions would affect borrowing costs, but there will be a cost”.

While following the programme exit three years after Cyprus agreed to the harshest terms imposed to a bailout country in the euro area with respect to the recapitalisation of its banking system, Cyprus will also receive the “democratic benefit” of formulating its policy the way people elect their representatives instead of policies imposed by others, the economist continued.

While allowing more democracy into fiscal policy “also carries the risk that politicians will revert to the profligate policies of the past,” the European Union’s “strict budget rules” combined with the government’s commitment to fiscal discipline make a fiscal derailment unlikely in the near future, Clerides added. “With respect to much needed structural reforms there could be an issue but we have to wait and see what the parliamentary elections will bring”.

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