Cyprus coalition falls, deepening political crisis

Centre-right Cypriot party Diko abandoned its coalition partnership with communist President Demetris Christofias on Wednesday, saying talks had collapsed over measures to address the country's economic and political woes. "The dialogue has terminated; Diko's co-operation with the president has ended," party leader Marios Garoyian told reporters.
Cyprus, which was already struggling to get its finances in order, was left reeling after a July 11 munitions explosion killed 13 people and destroyed the island's biggest power plant, a disaster that all but destroyed any hopes of economic growth this year. Last week, Diko urged Christofias to reshuffle his cabinet in a bid to restore confidence in the government by broadening its base and through swift decision-making on the political and economic fronts.
"Unfortunately it was not possible to achieve complete agreement for a strategic exit from the crisis, and the hoped-for convergence of views did not emerge," Garoyian said. "And serious differences in evaluations, views and approaches on the handling of the Cyprus problem remained," he added.
Last week, Christofias called on his cabinet to resign after Diko urged a reshuffle. Since then, he had been consulting with Diko, which wants to reset the government's manifesto based on tougher economic austerity measures and a less conciliatory stance on the island's decades-old division.
With Diko's departure, Christofias will have an even more difficult time forming a government that can restore public trust. His communist AKEL party is now in a clear minority in parliament, which could make it difficult for the president to push through legislation. The party has only 19 deputies in the 56-member House of Representatives.
In particular, the opposition has called for deeper cuts in state spending. Government spokesman Stefanos Stefanou said Christofias was "not isolated," even though his administration started as a three-party coalition in 2008 and has now collapsed. The socialist EDEK party pulled out last year. Stefanou said a reshuffle will be announced "within days."
"The aim of the new government is to dynamically and decisively address challenges the country faces. As regards the composition of the cabinet, the president will announce it very soon and everyone can judge from the result." The president and his administration have been under fire over their perceived incompetence in preventing last month's explosion. Indecision and political instability have prompted two international ratings agencies - S&P and Moody's - to downgrade the government's ratings over debt fears compounded by the blast aftershock.
Fitch is also pondering a downgrade as the political landscape unfolds while fears grow that the economic impact of the blast - an estimated 3 billion euros ($4.3 billion) - might see the island needing an EU bailout. On Wednesday, a study by economists at the University of Cyprus offered a particularly grim outlook, forecasting that GDP would contract by 2.4 percent in the 12 months from July 2011. Before the explosion, the government forecast 2011 GDP growth of 1.5 percent and of 2.5 percent in 2012. Those figures have since been reduced to zero for this year and around one percent next year.
The university study also projected that the unemployment rate would rise by one percentage point from the current level of 7.6 percent and that each family would see extra outlays of 1,000-1,800 euros as a result of higher costs and the weaker economy.
On Monday, the Bank of Cyprus, the island's largest financial institution, urged government action to prevent the eurozone country from having to seek a bailout. "With our inaction we are risking the ability of refinancing the state and the consequences will be instant and serious," a statement said.
"There is an immediate threat of the country entering the European Union's support mechanism with everything bad that entails." And central bank Governor Athanasios Orphanides warned last month that Cyprus could be headed for a bailout. "More drastic measures must be taken immediately," Orphanides, a member of the European Central Bank's governing council, said in a letter to Christofias. Since the blast, crowds have gathered almost nightly outside the presidential palace to call on Christofias to resign following the island's worst peace-time military disaster.