For the second time in just three years, Cypriot state is threatened by recession. Political crisis and banking ties with Greece have been enough to strangle the economy.

State debt crisis broke down barriers so-called PIIGS countries (Portugal, Italy, Ireland, Greece, Spain) and is spreading rapidly all over the European Union. Next on the list of countries to avoid collapse only with international emergency support seems to be Cyprus, one of the smaller EU economies. Huge exposure Greece, fiscal slippages and a series of natural disasters have been enough to turn the crisis into an economic policy.

The latest warning to this effect comes from the very central bank governor of the state. The Cypriot economy is showing signs of recession more and more alarming, when GDP fell by 0.7% in the third quarter from the previous quarter. Authorities should consider additional austerity measures, in addition to recently adopted a package of cuts, said Athanasios Orphanides, Governor of Central Bank of Cyprus.

The state has already lost access to international funding markets because of fiscal deterioration, said Orphanides, who is a member of the Governing Council of the European Central Bank (ECB).

The authorities recognize the problem

"It's a good thing that the critical nature of this situation was recognized," said central bank governor before the Committee on Finance of the Cypriot parliament.

Wednesday, Nicosia government and opposition have agreed on a new series of austerity measures. This includes freezing public sector wages and additional taxes on income for those working in the private sector.

High interest rates were virtually restricted access to international capital markets of Cyprus and the island authorities said they would accept a loan of 2.5 billion euros from Russia to cover the need for refinancing in 2012.

"The most important consequence was the loss of fiscal damage our credibility as a state, resulting in total exclusion from international markets since May," Orphanides said.

"The Cypriot government bond yields increased in the countries that are already in the support mechanism," he said. Monday, Cypriot government bond yields with a maturity of 10 years amounted to 10.8%. When they reached 6 5% - 7%, Greece, Ireland and Portugal have been borrowed from the IMF emergency and the ECB.

Cyprus already felt the pressure of international financial markets due to the significant exposure that is too indebted to Greece. According to credit rating agencies Fitch, Cyprus would lose 19 billion if Greece would be in default.

The three main credit rating agencies in the world - Standard & Poor's, Moody's Investor Service and Fitch Ratings - have low ratings because of exposure Cyprus Greece large (approximately 30% of the whole banking system).

Cyprus has officially entered recession in the first quarter of 2009, but recovered after a year and three months. If in 2009 the economy suffered a 1.7% contraction in 2010 it grew by 1%.

An explosion as an economic crisis

In early July, the main power plant in Cyprus has been affected by a powerful explosion. Losses amounted to nearly a billion dollars have led analysts to say even then that the state will need emergency financial assistance to avoid collapse.

With a budget deficit of 5.1% of GDP and public debt to 60% of GDP located, Cyprus is a much better situation than other European countries that have requested external financial aid emergency - Greece, Ireland and Portugal .

However, damage from explosion are considered so high that officials expect that, instead of an increase of 1.5%, the economy to stagnate this year.

The explosion, which took place on 11 July, left the country without half of its electricity. This occurred at the main naval base of the army, but when it was damaged and the power plant.

"To avoid the worst, including joining a support mechanism and what it means for the national economy would have taken more drastic measures immediately other," said then Athanasios Orphanides, the Cypriot central bank governor, in a letter to the president, Demetris Christofias.

Economy in a state of emergency

"Considering all factors, unfavorable international climate, difficulties in obtaining additional external funding and the impact exerted by recent events, I think the economy is in a state of emergency, comparable to that of 1974," wrote Orphanides, referring to the invasion of Turkey in northern Cyprus in 1974.

Economic contraction of 0.7% is recorded by Cyprus in the third quarter of 2011 compared to the previous quarter.

"The most important effect of fiscal deterioration was losing credibility as a state."