The Bank of Cyprus announced this week, that it would need a bailout from the EU, now the island nation’s problems just got more complicated.The centre-right Democratic Party (DIKO), the junior partner in the coalition quit the government today, according to The Financial Mirror.
The Democratic Party was in coalition with the communist AKEL since 2008, and its absence is likely to make talks on fiscal reforms more difficult. Despite its strong presidential system, reforms have to go through Cyprus’ parliament, but Cypriot President Demetris Christofias lacks the majority needed to push through any reforms. And this comes after Christofias asked his cabinet to resign last week.
The Bank of Cyprus warned that the government needed to enforce steep spending cuts after deficit for the first half of 2011 jumped to 3.47% of GDP from 1.89% a year ago. Cyprus is reeling from its exposure to €14 billion of Greek sovereign bonds, and an estimated €5 billion of Greek bank bonds, which is massive for a country with a $25 billion GDP.
S&P and Moody’s both downgraded Cyprus’ credit ratings, while Moody’s also downgraded its two largest banks the Bank of Cyprus and Marfin Popular Bank, because of their exposure to the Greek debt.
As if contagion fears weren’t enough, a blast last month damaged the island nation’s main power plant and is expected to cause a 17% drop in GDP this year.