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Cyprus public debt reaches 105 percent of GDP

The level of Cyprus public debt reached €17.8 billion, corresponding to 105% of GDP, in the third quarter of 2010 according to a recent article in StockWatch.

ACCORDING to the latest figures to be released, Cyprus’ debt to domestic and foreign creditors in the third quarter of 2010 reached €17.8 billion. This corresponds to 105% of the Island’s Gross Domestic Product and places Cyprus second in the list of the most ‘in debt’ countries in the euro area behind Italy.

However, the official calculation of the public debt in 2009 as reported in the Eurostat tables was 58%; one of the lowest in the euro area.

According to StockWatch, the discrepancy between the two calculations is mostly due to the “invisible” debt to the Social Securities Fund. Unlike the corresponding pension funds in developed countries, the Social Securities Fund is relatively new and still shows annual surpluses and an accumulated reserve estimated in excess of €7 billion.

The government has borrowed a large part of this reserve at an exceptionally low interest rate. For example, in the third quarter of 2010, the government borrowed €7.1 billion.

This is regarded as intergovernmental borrowing and achieved via 13-week bills, which explains why it is not included in the official public debt calculations. In addition, Cyprus is one of the few countries able to make this accounting “trick”.

So although the total public debt has reached €17.8 billion, the “official” debt is approximately €10.5 billion, which corresponds to 62% of the Island’s GDP.

The debt to the Social Securities Fund is increasing and must be repaid. To achieve this, the government decided to invest around €200 million/annum into other forms of investment. Since June 2009, it has invested €337 million in corporate bonds that receive an average rate of return of 4% compared to the 1.5% that the Fund currently receives.

However, the government’s debt to the Fund continues to grow.

In the past few years, a new intergovernmental borrowing has appeared, which is included in the state books as borrowing from the “Funds Under Management”. According to the Ministry’s technocrats, those funds include the Agricultural Insurance Organization, the Human Resource Development Authority of Cyprus etc.

Until recently, the state borrowing from those funds was zero.

Since 2008, there has been a sharp increase in this type of borrowing and according to latest data, the government debt in those funds stood at €199 million.

The comparatively high debt of Cyprus has been discussed by the European Commission.

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