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Cyprus cabinet quits as fiscal woes deepen

NICOSIA - The Cypriot cabinet resigned on Thursday to try to damp down public fury over a fatal munitions blast that destroyed the island’s largest power plant and compounded its economic woes, possibly forcing an EU bailout.

Government spokesman Stefanos Stefanou said it would not necessarily need the help, but even before the energy crisis caused by the July 11 blast, borrowing costs had risen steadily because of Cyprus’s exposure to Greek debt.

“Until now, Cyprus has managed to satisfy its financing needs until the end of the year. So don’t take it as a given that Cyprus will be admitted into a support mechanism,” Stefanou told reporters.

Thousands of Cypriots have protested over the blast, blaming state incompetence for allowing the seized munitions to be stored near the power station in scorching heat.

Facing probably the biggest challenge of his political career, President Demetris Christofias, elected for a five year term in 2008, has also been under pressure from coalition partners DIKO to create a broad-based unity government to tackle the crisis.

When he did not immediately heed the call last week, DIKO on Wednesday asked its two ministers to resign. Christofias responded by asking all of the ministers to quit.

“The president of the republic briefed ministers of his intention to proceed with a broad reshuffle of the government and asked they place their resignations at his disposal,” Stefanou said.

Christofias wields executive power, and his own resignation is seen as very unlikely.

Economic fallout

Cyprus, a euro zone minnow with a GDP of 17.4 billion euros, has been left shellshocked by the explosion and any prolonged political wrangling threatens to derail much-needed economic reforms.

Preliminary Finance Ministry estimates suggest the blast will wipe out growth forecasts this year to zero and Moody’s on Wednesday cut Cyprus to three notches above junk.

Last week, the island’s central bank governor and European Central Bank governing council member, Athanasios Orphanides, warned that without immediate action Cyprus might follow Greece, Ireland and Portugal in asking for an EU handout.

The cost of damage from the explosion and subsequent disruption from rolling power cuts has been cited as anything between 1 and 3 billion euros. The Finance Ministry has not given an assessment, but 3 billion euros would represent 17 percent of Cyprus’s GDP.

Bond yields, already under pressure because of Cyprus’s exposure to Greece, have risen since the blast. The yield on a 10 year government bond issued to investors last year was bid at around 9.5 percent on Thursday, from 8.9 percent a week ago and 6.20 percent in early May.

The munitions, confiscated from a ship sailing from Iran to Syria in 2009, were stored a few hundred metres away from a power station on the south coast in often scorching conditions, despite appeals from army officers for their removal.

Christofias has said an inquiry into the incident will also scrutinise his own rule, though aides have repeatedly said he was unaware of the deteriorating storage conditions.

As leader of Cyprus’s dominant Greek Cypriot community, he leads reunification talks with estranged Turkish Cypriots to clinch a peace deal to end decades of conflict. The absence of such a deal is harming Turkey’s bid to join the EU.