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Cyprus President Dismisses Cabinet as Crisis Worsens After Blast

Cyprus President Demetris Christofias. Photographer: Jock Fistick/Bloomberg
Cyprus President Demetris Christofias. Photographer: Jock Fistick/Bloomberg

July 28 (Bloomberg) -- Cypriot President Demetris Christofias ordered his cabinet to resign as political discord deepens after a munitions blast wrecked a main power plant and Moody’s Investors Service cut the government’s credit rating.

Christofias requested and received the resignations of his government ministers today, spokesman Stefanos Stefanou told reporters in Nicosia. The president wants to consult government parties about the formation of a new administration, which will happen “soon,” Stefanou said.

Cyprus’s prospects are deteriorating after a blast at a munitions depot on July 11 knocked out more than half of the country’s power generation, which Credit Suisse AG estimates may cost the economy 14 percent of gross domestic product. On top of that, Moody’s yesterday said there’s a “material risk” that losses on Greek debt holdings will force the country’s banks to seek a bailout “over the next few years.”

Cypriot bonds have slumped, pushing their yields close to the levels on Irish and Portuguese debt. Both countries have been forced to follow Greece in seeking a European Union-led bailout. The yield on Cyprus’s 10-year bond maturing in February 2020 was at 10.05 percent today from 6.22 percent three months ago. Yields on similar-maturity Irish and Portuguese bonds are at 11.16 percent and 10.84 percent, respectively.

Cyprus will not need to ask the EU for help as it has already covered its financing needs for this year, Stefanou said.

Crisis Path

Cyprus’s economy, the euro area’s third-smallest, expanded 1 percent last year and the government posted a budget deficit equivalent to 5.3 percent of GDP. Public debt is expected to peak at 62 percent of economic output in 2012, compared with 61.6 percent this year and 60.9 percent in 2010, according to the Ministry of Finance. Outstanding debt at the end of last year was around 10.6 billion euros ($15.2 billion).

“We are not at a point where Cyprus is the next to join Greece, Portugal and Ireland,” said Padhraic Garvey, head of developed-market debt at ING Bank NV in Amsterdam. “Cyprus is also tiny compared with other stressed peripheral issuers, and hence it is more of a sentiment issue than something that materially affects the path of the crisis.”

Garvey said there is “no immediate need for panic” on Cyprus’s funding needs.

The east Mediterranean island’s president yesterday asked the ministers in his coalition government of communist AKEL and center right DIKO to submit their resignations. His request followed the resignation of the two remaining DIKO ministers in his government, who were asked to do so by their party chairman Marios Garoyian hours earlier.

The July 11 explosion at a munitions depot which knocked out the Vasilikos power plant accounted 53 percent of total power generation capacity and has amplified fiscal concerns, Moody’s said. The rating company downgraded Cyprus from A2 to Baa1, the third notch above non-investment grade.

On July 26, negotiations between the government and the rest of Cyprus’s political parties on a proposed austerity package collapsed.

To contact the reporter on this story: Stelios Orphanides in Nicosia at

sorphanides@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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