IMF warns Cyprus over economy

Cyprus must take swift action to shore up its economy, the IMF warned today, saying it faced strong economic headwinds and substantial downside risks which were likely to persist.

"We think the situation at the moment is very serious. The fact that the government cannot access the capital markets is very serious and the risks to the banking sector compound that," said Erik Jan de Vrijer, assistant director of the IMF's European Department.

"The first priority for Cyprus is to do all it can to avoid that these problems get out of hand."

Worries have grown that Cyprus's tiny economy would be the fourth in the euro zone to need a bailout since a July munitions explosion crippled its largest power plant. Mr De Vrijer was responding to a question on whether it could at any point require such aid.

"I think that there is time, and there is opportunity for the government to take decisive action to avert the possibility of these problems getting worse and worse," he said.

Cyprus's credit ratings have suffered from exposure of its banking sector to Greek debt and fiscal slippage domestically, pushing up the cost of it borrowing on financial markets.

Last week, the island's cabinet said it had given its finance minister the go-ahead to take a €2.5 billion loan from Russia to refinance maturing debt.

Mr De Vrijer said the best way authorities could restore confidence was to make a "large upfront reduction" in their fiscal deficit next year.

Measures to achieve fiscal savings should focus mostly on expenditure reductions, which experience has shown provide more durable savings than tax increases, the IMF said.

The fund expected "little if any growth" this year, and to register a small contraction in 2012, it said.

In February, the IMF had issued a markedly more upbeat scenario of growth of between 1.5 and 2.0 per cent for this year.

Asked what had prompted the radical revision, Mr De Vrijer said a July 11th munitions blast which destroyed Cyprus's largest power station had an impact. "But far the most important one is the financial turbulence in Europe and the diminished growth prospects in North America and Europe (which) are having an impact on Cyprus."

Reuters