I was interviewed on the 22nd of October about the potential repercussions of a downgrading of the Cypriot Economy by credit rating agencies. Back then I argued that the downgrading could be avoided if urgent action is brought to bear by the government to resolve the spiralling budget deficit. I also argued that any downgrade would not be dramatic, as most agencies would wait to see if the new 2011 budget introduces radical steps to redress the balance between government spending and expenditure before launching a more radical reduction to our credit score.
However, the argument went unheeded and we have been downgraded. Some investment assets which are required by law in the United States to only hold top rate bonds will sell some of our assets, but the immediate repercussions are much more subtle as we make switch in investors' minds from one of the "safe" states of Europe to one of the "worry" states of the EU.
This change affects international business based in Cyprus. The investment report of Cypriot banks published just last week by Moody's argues that the negative prospects of the economy are clouding the banks ability to preform well, as the majority of their exposure is in Greece and Cyprus. This was surprising to me since our banking sector has weathered the financial crisis surprisingly well, and one is loathe to think that the worries about the government's financial position is hampering the efforts of the Cypriot banking sector to secure better credit abroad.
One can not but worry that a self fulfilling prophesy has started to affect us: If we are seen as a potential future "Greece" and "Ireland" of Europe, people will start to withhold investments or demand a higher interest for loans to the Cypriot government and Cypriot companies, in effect forcing Cyprus in an ever darkening future.
The response to the government was to announce measures that are frankly not radical enough to convince us of their commitment to reduce the government wage bill, let alone convincing any credit rating agency not to further downgrade the republic. The efficiency drive and wage reduction promised are so timid that they are not enough to reduce the government wage bill, and as a result the government will once again starve the economy of much needed investment in order to try and keep the civil servants satisfied but also contain the increase of the budget deficit. We all know what needs to be done in terms of efficiency and wage cuts in government, but we seem to prefer to slide towards a future that looks increasingly similar to Greece rather than do something about it today. My prediction: Look forward to a further downgrade of our economy after the timid budget is passed by parliament in December.