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Cyprus approves deficit-cutting budget for 2012

December 16, 2011
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NICOSIA, Cyprus—Cyprus lawmakers on Friday approved the austerity-driven budget for 2012 aimed at slashing a burgeoning deficit.

Lawmakers hope to restore confidence in the small, euro18 billion ($23.5 billion) economy and stave off a possible bailout with a budget the finance ministry called the "tightest in 35 years."

The vote was delayed by several hours on Friday as opposition parties -- which hold a majority in Parliament -- negotiated additional spending cuts aimed at bringing the deficit below the 2012 target of 2.4 percent of gross domestic product. The deficit now stands at over 6 percent.

The added measures that House Finance Committee Chairman Nicos Papadopoulos said were worth around euro100 million include a freeze on hiring to fill vacant government jobs, cuts to overtime pay and consultancy fees, and scrapping public sector perks such as interest-free loans for car purchases.

Lawmakers earlier in the week approved another austerity package worth euro148 million ($193 million) that included a hike in a sales tax from 15 to 17 percent and a two-year public sector wage freeze that triggered a daylong, government workers' strike on Thursday.

Growth for 2012 is forecast at only 0.2 percent of GDP. The budget sets expenditures at around euro7.5 billion. A third of that goes toward paying 70,000 workers on the state payroll.

Buffeted by the eurozone crisis, Cyprus has been shaken by consecutive credit rating downgrades that have brought it to a step above junk status, due mainly to its banks' large exposure to Greek debt.

Unable to borrow from international markets, the eurozone country has turned to Russia for a euro2.5 billion ($3.27 billion) low-interest loan to meet most of its financing needs for next year.

The Fitch Ratings agency said Friday it was considering cutting Cyprus' credit grade further by one or two notches after concluding that "a 'comprehensive solution' to the eurozone crisis was technically and politically beyond reach."

A finance ministry said the warning shows the country urgently needs to get its finances in shape.

Before the vote, Finance Minister Kikis Kazamias said he's confident the country can prevent the worst, despite the gloomy economic climate in Europe. Some opposition lawmakers have argued that more spending cuts may be needed.

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