The finance ministry said that the increase in unemployment over the past years to double digit figures after Cyprus was caught up in a financial turmoil was the result of increased corporate interest rates.
“Recent research has indicated that there is a correlation between corporate interest rate and risk of default with the unemployment rate,” the finance ministry said in a report on its website on Tuesday. “The driving force behind this seems to be that higher interest rates in terms of higher financial risk reduces vacancy creation and increases vacancy costs for firms, which in turn increases unemployment”.
“In turn, unemployment has both, economic and social impacts and any therapy is time consuming to achieve,” the finance ministry continued as the jobless rate is considered a “lagging indicator,” as it begins to drop after the economy enters a recovery course.
Cyprus, which traditionally enjoyed full employment, saw its unemployment rise from 3.7 per cent in 2008 gradually and peak at 16.1 per cent in 2014 after events sparked by the collapse of Lehman Brothers led to a global financial crisis and subsequently to the euro crisis. Cyprus lost access to financial markets in May 2011 when the yields of its 10-year government bonds on the secondary market exceeded 7 per cent forcing it 13 months later to request a bailout. Negotiations with international creditors dragged on over several months and were concluded in March 2013 culminating in the bail-in of Bank of Cyprus and the collapse of Cyprus Popular Bank.
The increased financial risk, as measured by the difference of the yields of Cypriot government bonds with respective German securities or spread, “is indicated to have begun in mid-2011 onwards,” the finance ministry said in a statement on its website on Tuesday. “The spread of the Cyprus international government bond due 2014 with a similar German sovereign bond due 2014 experienced significant upswing during 2011 to 2013 when it increased dramatically as a result of the financial crisis. The above spread increase was of magnitude of 16.6 percentage points within 6 successive quarters”.
In that period, the unemployment rate rose by 8.6 percentage points, the finance ministry added. “Signs of easing of financial risk seem to have initiated by the end of 2015 leading unemployment to start exhibiting some signs of stabilisation and reduction in the second quarter of 2015”.
“As a result, the importance of confidence and trustworthiness exhibited by domestic and foreign investors towards the Cyprus economy become crucial and necessary to enhance the robustness of economic activity,” the finance ministry said in the report’s concluding remarks. “In terms of economic policy making, what matters is to safeguard and foster financial stability, which is necessary for retaining macroeconomic stability. The effective supervision exercised by the central bank, in conjunction with efficient policy measures the ministry of finance should pursue, can maintain and safeguard financial stability, which is both, necessary and sufficient conditions to achieve sustainable growth in the longer run”.