Cyprus ministers resign ahead of Cabinet reshuffle

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Posted: Jul 28, 2011 9:24 AM
Cyprus ministers resign ahead of Cabinet reshuffle

Cyprus' Cabinet resigned Thursday in preparation for a reshuffle aimed at addressing an economic and energy crisis caused by a blast that knocked out the island's main power station and killed 13 people.

President Dimitris Christofias will go ahead with the reshuffle soon after concluding consultations with the leadership of junior governing coalition party DIKO, government spokesman Stefanos Stefanou said. The ministers will stay on until the reshuffle is completed.

The embattled president has been under pressure for a Cabinet reshuffle after the ministers of defense and foreign affairs resigned over the July 11 explosion of seized Iranian munitions that were being stored at a naval base near the power station.

The blast deeply eroded the government's credibility among many Cypriots who see official negligence as the real culprit behind the disaster. Some have called on Christofias to resign, which he has flatly ruled out.

Asked if he would consider stepping down, Christofias said: "No sir, under no circumstance. The people elected me and I answer to the people."

Christofias still has to contend with the blast's economic toll. A Cabinet reshuffle will help remove at least some of the uncertainty surrounding his ability to press ahead with spending cuts and fiscal reforms.

On Wednesday, Moody's downgraded Cyprus' credit rating by two notches from A2 to Baa1 over concerns about the blast's economic fallout, the combative political climate and the banking system's exposure to bailed-out Greece.

The agency warned of another possible downgrade and reduced the country's growth forecasts for the island to 0 and 1 percent in 2011 and 2012, respectively _ a drop of around 1.5 percent from EU growth estimates for both years.

EU experts estimate that the blast's overall cost to the island's euro17.4 billion ($25.14 billion) economy will be over euro2 billion ($2.89 billion) while damage to the Vasiliko power station alone _ which generated more than half the island's power output and will take a year to become fully operational again _ is estimated at euro700-800 million ($1-1.15 billion).

Cyprus' top banker last week warned that the blast may force Cyprus which began using the euro in 2008 to seek a bailout if deep spending cuts aren't made swiftly.

Stefanou on Thursday dampened talk of such a bailout, saying Cyprus can meet it's debt refinancing needs for the year and that more steps are being taken for the future.

"So let's not take it for granted that Cyprus will enter the support mechanism and keep coming up with different scenarios," he said.

The government has already been mulling a raft of tax and cost-cutting measures following several credit rating downgrades because of the bank system's Greek exposure. Last week, the government and opposition leaders agreed on a first package of spending cuts to buoy the economy in the wake of the blast.

But there is still disagreement on how deep cost cuts should go, especially to the public payroll that takes up about a third of the island's euro8-billion ($11.6-billion) budget.

European Commission spokeswoman Chantal Hughes said on Thursday that the EU's executive remains "fully confident that the Cypriot authorities will fulfill their commitments" to get the country's budget deficit below the bloc's limit of 3 percent of economic output.

Cyprus has promised to cut its budget deficit _ which stood at 5.3 percent of gross domestic product for 2010 _ to below 4 percent this year and below 2.5 percent next year, Hughes said.

However, in its most recent assessment of the Cypriot economy, the Commission struck a much more critical tone.

"Budgetary outcomes could turn out worse than projected" by the Cypriot government, the Commission warned. In its own economic forecast, the Commission expects Cyprus to run up a deficit of 5.1 percent of GDP this year and 4.9 percent next year if no further cost-cutting measures are taken.

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Gabriele Steinhauser contributed to this report from Brussels