The wrong people resigned in Cyprus on Thursday. The Mediterranean island’s ineffectual government quit at the request of the president, Demetris Christofias. For sure, it will not be missed; politically speaking, Cyprus is a one-person state. The person who should have resigned is Mr Christofias, a Communist of the old school who is proving singularly unable to address the country’s growing list of problems.
That list keeps growing longer. Moody’s cut the Cypriot credit rating to three notches above junk this week. The scale of the island’s challenges, and the rise in political instability, suggest Cyprus’s creditworthiness has further to slide – and that the eurozone has another peripheral member to worry about. Even before a July 11 explosion destroyed its main power station, Cyprus was heading towards the precipice. Cypriot banks hold about €31bn of Greek sovereign and bank debt – or about 170 per cent of gross domestic product. They are well capitalised, with aggregate tier 1 ratios of 12 per cent. But their likely participation in any Greek bond exchange would devour most of that, leaving them in need of new capital. The European financial stability facility would then likely have to step in to recapitalise the sector.
The power plant explosion may be the tipping point. It will cost an estimated €2bn to repair, which will wipe out growth prospects this year and next. It could also raise the country’s debt level, which is a respectable 62 per cent of GDP. Investors are already fleeing: the yield on 9-year Cypriot bonds is over 10 per cent, just below where similar Irish and Portuguese paper trades. Central bank governor Athanasios Orphanides warns that without drastic spending cuts and higher tax revenues, a sovereign bail-out may be needed. Mr Christofias must start cleaning up the mess. Otherwise, Cyprus will become the next Greece.