The governor of the Cyprus central bank has warned that the economy faces “a state of emergency” following a disastrous explosion at a Greek Cypriot naval base that caused 13 deaths and an estimated €2bn in damages,
Athanasios Orphanides said that unless harsher than planned austerity measures were adopted immediately, Cyprus might become the next southern European member of the eurozone to seek a bail-out.
The explosion on July 11, which destroyed the island’s largest power station, “delivered crushing blows to the economy, which is already in a dire situation”, Mr Orphanides said in a letter to Demetrios Christofias, the Cyprus president.
“Broader and more drastic measures than those being discussed [before the explosion] are needed to avoid a worse outcome – such as resorting to a support mechanism,” he said.
Concern was mounting even before the accident that Cyprus might become the next victim of “contagion” from Greece’s debt crisis, because of the banking sector’s large holdings of Greek bonds.
Yields on a 10-year bond issued last year have jumped more than 200 basis points over the past two months.
“Given the unfavourable international environment, difficulties with borrowing abroad and the impact of recent, I believe the economy is in a state of emergency similar to that of 1974,” Mr Orphanides said.
He was referring to a Turkish military invasion that year, in response to a Greek-led coup, which split the island into separate Greek and Turkish Cypriot zones and triggered an economic collapse.
Harilaos Stavrakis, the finance minister, said Cyprus’s projected economic growth rate this year would fall from 1.5 per cent of gross domestic product to zero following the blast.
The cost of repairing the 830MW Vassiliko power plant, which produced about half the island’s electricity supply, is estimated at more than €1bn. The government is seeking emergency aid from the European Union to help cover the cost of repairs.
Haris Thrassou, chairman of the Cyprus electricity authority, said last week that the plant had been insured for €600m.
The communist-led government has been discussing structural reforms to reduce a budget deficit projected at 5.1 per cent of gross domestic product this year.
Measures being considered include staffing cuts in the civil service, the island’s biggest employer, by hiring one new employee for every four who retire, as well as privatisations of state-owned entities and a 10-20 per cent reduction in social benefits.