Much was made this week of Cyprus’ ‘clean’ exit from the three-year bailout programme. The spin was good, even from the international lenders, so barely anyone noticed that things were not quite as they seemed.
On the fiscal side, it can legitimately be called a clean exit, thanks largely to extremely cautious policies pursued by the finance minister, Harris Georgiades. Seeing ahead to difficulties in getting the foreclosure legislation through parliament, he made sure that the government had enough cash on hand to keep meeting debt payments even while bailout payments were delayed.
Cyprus also accessed the international financial markets three times during the bailout programme. This is partly why it used only €7.5 billion of the €9bn pledged by the European Stability Mechanism (ESM) and a bit less of that pledged by the IMF. This is also a positive message to send to the markets.
However, there are a couple of reasons to be cautious. First, Cyprus did not actually exit with a ‘clean slate’, having missed the last disbursements from both the ESM and the IMF.
It was due a €275m tranche from the ESM in January and around €125m from the IMF by May. It never received these because it had not completed all of the preconditions.
The ESM had demanded as a ‘prior action’ the parliamentary approval of the bill to turn telecoms operator Cyta into a private company. The IMF named four ‘structural benchmarks’ in its last review, one of which was “parliamentary approval of a public administration reform package, including a revision of the wage setting framework for the general government”.
For me, the most serious absence is not the non-privatisation of Cyta but the lack of wage reform.
In a country that is highly sensitive to oil prices, a large public-sector wage bill has long been a key weakness of Cyprus’ public finances.
Government spending on employee compensation almost doubled in the 10-year period between 2002 and 2011. In 2003 alone, thanks to big increases immediately before a presidential election, compensation leapt by 21%.
A range of temporary measures to limit public-sector wages expire at the end of this year. If wage reform is not implemented before that happens, all the work and sacrifices of the past three years could come to nothing.