Cyprus moves to reassure markets

Cypriot politicians approved a package of tax increases and cost cuts in a bid to forestall further credit rating downgrades and ease concerns that the European Union member country may be forced to seek a bailout.

For the first time, government workers’ pensions will be partially paid by a levy imposed on their salaries.

Government workers will also take a pay cut of 1.5 to 3.5% for two years according to how much they earn.

Opposition parties, which hold a majority in the 56-seat parliament, voted to increase the levy to 3% – half a percentage point more than powerful trade unions had conceded in negotiations with Finance Minister Kikis Kazamias.

Trade unions have threatened to strike if politicians breached that deal and hiked the levy.

The package also includes tax increase for high income earners and property, and a €350 annual levy on all companies registered on the island.

But politicians deferred a bill that would have raised the nation’s sales tax from 15 to 17%, which the finance ministry had hoped would earn €160m over two years.

That bill may be incorporated in a second batch of austerity measures worth around €360m that Mr Kazamias pledged to unveil when the House reconvenes September 15.

“Unfortunately, we have already lost the confidence of the markets,” opposition DISY party politician Averof Neophytou told parliament before the vote.

“It will take a lot of time and more painful measures to earn back their confidence.”

Fitch ratings agency earlier this month downgraded Cyprus to BBB, or two notches above junk status, saying the island would likely need a bailout.

Standard & Poor’s agency also cut Cyprus’ rating to BBB+ this month and left the door open for another cut. Moody’s Investors Service downgraded the island to Baa1 late last month.

Mr Neophytou said it is unlikely the island will avoid another downgrade, driving interest on Cypriot bonds higher and limiting the government’s ability to borrow from the markets.

That may, in turn, force the country to seek a bailout from its EU partners to refinance around €1.9bn in debt maturing by April next year.