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Fiscal watchdog says Co-op policies jeopardise public finances

Fiscal Council chief Demetris Georgiades

By Stelios Orphanides

The Fiscal Council said that while the island was losing on competitiveness, it was also risking returning to past practices which led to fiscal derailment in the absence of a wage setting mechanism in the public sector.

Furthermore, recent government decisions, such as the issue of bonds in favour of the Co-op, the intention to introduce Estia and reverse past pay cuts in the wider public sector, “may unnecessarily burden public finances, delay the necessary reduction of public debt, result in moral hazards, create a precedence for organised groups to raise new demands, complicate needed reforms and may negatively affect citizens’ tax compliance,” the Council said in a statement on its website on Monday, three days after it held a meeting with Finance Minister Harris Georgiades.

The recovery of the government’s deposit at the Cyprus Cooperative Bank, resulting from the issue of bonds in favour of the lender, will depend on how the legacy Co-op that will manage the residual non-performing portfolio will operate after Hellenic Bank acquires the healthy part of its operations, the Fiscal Council, an advisory body tasked with promoting fiscal responsibility, said. “To maximise the recovery degree of the deposit, it would be wise to assign the management of the organisation to specialised technocrats tasked with only recovering the maximum possible from the loans due”.

Separating this effort from welfare policy, limiting political interference, the modernisation of the legal framework and speeding up court procedures are “fundamental factors” for the success of the legacy Co-op, the Council said.

The body which will manage €7bn of the failed state-owned lenders loans, will shield the government –which also extended guarantees to Hellenic Bank– from contingent liabilities, provided the necessary mechanisms and procedures are in place to ensure that the legacy Co-op will do everything possible to recover loans, the Fiscal Council continued.

The Cypriot economy, which in 2015 emerged from a prolonged recession, is expected to expand 3.8 per cent this year after growing 3.9 per cent in 2017. The government, which last year generated a fiscal surplus of 1.8 per cent of economic output is forecast to generate a fiscal surplus of 1.7 per cent this year. Last year, public debt fell to 97.5 per cent of the economy and is expected to increase this year again beyond the 100 per cent mark as a result of the bonds issued in favour of the Co-op.

The island’s credit rating continues to be non-investment grade mainly on high public and private debt. Household and corporate debt combined accounts for 2.5 times the size of the economy and half of it is non-performing. The government completed a bailout agreement more than two years ago after carrying out part of the agreed reforms in the light of political opposition and better than expected economic and fiscal performance. On July 8, the parliament passed a bundle of loan amendments aimed at tackling strategic default, which was conditional for the European Commission to accept the deal between Hellenic Bank and the Co-op.

The Fiscal Council also warned that any social support to the team of Co-op workers who will choose to retire or will be forced to do so after the takeover, will have to be proportional to that that is in place for the entirety of workers. “Any additional amounts (paid out) will have to be very limited to avoid an unnecessary fiscal burden and a negative precedence as well create a sense of unfair treatment among other citizens,” the Council said.

With respect to Estia, the government’s scheme to subsidise loan repayment of households whose primary residence is collateral for loans, also extended to small and medium-size enterprises (SMEs), the eligibility criteria could “be strengthened” in accordance to other schemes in place, the Council said.

The government’s scheme will not allow a household of six and a residence worth €250,000 without any other assets to benefit if its annual income is €51,000, the Council said. On the other hand, a one-person household with a primary residence worth €350,000, other assets worth at €375,000 and an annual income of €50,000 will be eligible.

The subsidy, set at one-third of the monthly loan repayment, could also vary depending on a household’s disposable income and the outstanding debt.

The Fiscal Council said that pay rises and the reinstatement of pay cuts in the wider public sector agreed with unions almost two months ago, combined with the current public debate with unions in state education and other institutions “highlight the need of establishing a transparent and scientifically designed mechanism to set wages in the public sector,” the budget watchdog said. “We are concerned over the way the dialogue is carried out with every side invoking isolated numbers as a result of which a possible agreement may be the product of an irrational give-and-take”.

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