The Government has staunchly defended its decision to secure a €2.5-billion loan from the Russian Federation that would help it meet its financial obligations at the start of next year. It saw this as a perfectly reasonable decision, especially as the interest that would be charged by the Russian government would be only 4.5 per cent.

Not even Cyprus’ financial institutions were prepared to lend money to the government at such low interest. When it borrowed money locally a couple of months ago, it paid an interest of six per cent. In the secondary market Cyprus government bonds are trading with a yield in excess of 11 per cent, which is the reason the government cannot borrow from international markets.

The question politicians and economists have been asking, ever since the loan story broke last week, is why the Russian Federation had agreed to give a loan with such a low interest rate. Everyone implied, without spelling it out, that there had to be strings attached, but finance minister Kikis Kazamias was quick to allay these fears, claiming that the loan agreement was based on the friendship of the two countries.

It defied belief that Kazamias could resort to such a ridiculous argument, which can only be interpreted as an attempt to hide something. The truth is Moscow does not need to buy influence in Cyprus as President Christofias has publicly expressed his allegiance to Russia on several occasions. Russia’s finance minister yesterday noted Cyprus was the first eurozone country to seek financial assistance from Moscow.

Even if there were no strings attached, securing a loan from another country created dependence, as DIKO deputy Nicholas Papadopoulos pointed out on Monday. What if in future the Russian government demanded we re-examined our double taxation treaty? Would we be able to say no, given our financial dependence? Important questions that our government, in its desperation to secure funds, might not even have thought about.

The truth is the securing of the loan, while helping the government meet its immediate financial requirements, may harm the economy. As soon as the news broke, public sector unions adopted a much harder line in their ongoing negotiations with Kazamias, regarding the second package of measures. They threatened strike action and legal measures if the government docked 25 per cent from the 13th salary and froze the payment of CoLA for two years.

With the loan secured, the government is more than likely to give in to the unions and not tackle the structural problems of the economy, which would mean another downgrading. Standard and Poor’s agency had put Cyprus on credit watch last week, pending the approval of the second package. And the EC is unlikely to accept the reduction of the budget deficit through borrowing.

We can only hope the loan will be used judiciously and not fund another bout of government indecision and procrastination.