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Our View: Success of rescue package depends on length of lockdown

NOTHING unites our parties and politicians like the mission to spend the taxpayer’s money ostensibly to improve to improve people’s lives. This unity and spirit of consensus was evident on Friday when the House of Representatives voted through the raft of 10 bills, of which most were aimed at shoring up the economy by supporting businesses, workers and the self-employed.

One of the measures, a supplementary budget of €370 million envisaged paying part of the wages of employees of businesses that had been forced to suspend their operations, fully or partially, by the government decrees aimed at preventing the spread of Covid-19, parents staying at home to look after their children, students obliged to stay abroad and the health sector. Apart from supplementing wages, measures tried to boost the liquidity of companies by suspending payment of VAT, postponing the introduction of higher Gesy rates and the submission of tax declarations among other things.

There have already been complaints about the suspension of operations scheme by the employers’ federation OEV, which objected to the conditions it set to make a business eligible for state support. Its main objection was linked to the condition that no staff would be laid off, claiming that this would lead businesses that were not in operation sacking all its staff for the duration of the lockdown rather than take the state subsidy of wages. Perhaps businesses fear that if the lockdown lasts more than a couple of months, they would not be able to operate with the same number of workers once they resume operations.

The expected duration of the lockdown is the key to all the business decisions. How long will the government’s decrees, which have switched off the economy, be in force? Nobody knows the answer, so it is understandable that businesses will be rather cautious about applying for state assistance that comes with conditions that could prove costly if the decrees stay in place for longer than a couple of months, something not beyond the realm of possibility.

We suspect even greater caution will be shown by businesses in applying for state-guaranteed, low interest loans from the banks. The bill for state-guaranteed loans worth €2 billion is expected to be passed on Sunday together with the bill for the suspension of loan repayments until the end of the year. The second bill could boost the liquidity of businesses, even though it could mean bigger monthly repayments when the suspension is ended. As regards taking new loans, many businesses would be reluctant to increase their exposure given the general uncertainty, unless they believe they would not have to repay them, thanks to the state guarantees.

Such thoughts may have been given substance by reports the government guarantees will cover 70 per cent of the losses possibly incurred from the loans and banks 30 per cent. Add to this the provision that loans could be given without collateral, at a slightly higher interest rate, and the possibility of the scheme turning into a major disaster for public finances, cannot be ruled out. The only safeguard against this happening would be provided by the banks that would be very careful about who they grant these loans to considering that they would take a 30 per cent hit if they are not repaid.

The Bank of Cyprus has repeatedly warned that banks could only help healthy businesses. “If banks do not succeed in restricting their support to viable organisations, then the support will fail and the effort to protect employment and wages will fail,” said a bank official some 10 days ago, anticipating the pressure lenders will come under to grant loans. Finance minister Constantinos Petrides said on Thursday that there would be a cost to the banks, as a result of the government’s scheme, but they were not expected to have viability problems. Speaking the following day on a radio show, he was blunt, in explaining that banks were obliged to help, saying that “banks know that if the economy collapses, they will also collapse.”

All the government’s measures are, justifiably, focused on protecting jobs, tens of thousands of which have been put at risk by the decrees that have switched off the economy. The cost of protecting these jobs is extremely high even though the government can afford it for one, or at most, two months. If the lockdown ends in two months all will be well, but if it drags on any longer, the country could be faced with big financial problems. We can only hope it will not come to this.

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