Cyprus Mail
Cyprus

President upbeat on second review

By Staff Reporter

PRESIDENT Nicos Anastasiades sounded upbeat yesterday over the anticipated outcome of the second review of Cyprus’ financial assistance programme.

Speaking to reporters after the October 28 parade in Nicosia, Anastasiades said he expected the second review mission – which begins today and which will last for about two weeks – to be “equally important and positive” as the first assessment of three months ago.

Anastasiades refused to be drawn as to what the international lenders – collectively known as the troika – would focus on during this second review, advocating a wait-and-see approach.

But the balance sheet of Bank of Cyprus and the overall stability of the financial sector is likely to be the troika’s focal point.

Reports suggest the foreign inspectors will be looking at the long-term restructuring of the banking sector, with an emphasis on the island’s largest lender, Bank of Cyprus (BoC). The bank’s high ratio of bad or non-performing loans are a cause of particular concern, as is the outflow of deposits over the last months in spite of the capital controls.

Troika officials are therefore likely to avoid committing to a significant relaxation or outright lifting of restrictions on capital anytime soon, placing instead milestones for a gradual easing on the capital controls.

Citing senior EU sources, Kathimerini reports that despite this the international creditors are not worried about BoC’s core capital, which they describe as “robust.” The same sources ruled out the chance of a new ‘haircut’ or seizure of deposits to recapitalise the bank.

Talks with the government and stakeholders are also expected to revolve around the idea of splitting BoC into a good bank/bad bank.

Progress in privatising certain semi-state enterprises – the target being to raise some €1.4bn – has been slow to non-existent, and the international lenders are certain to address this point as well. Another hot topic will be the plans to set up a national health scheme as a means of saving the state money.

The state of public finances is not at the top of the list of the troika’s worries. Overall, GDP projections for the period 2013-2014 are unaltered. The international lenders reportedly believe that the rate of economic recession this year will be lower than initially forecast; however, this would be offset by a slightly greater-than-anticipated slump during 2014.

The technocrats believe the full impact of the recession will become apparent next year. Although consumption has taken a hit, it has not fallen off a cliff for the time being. The troika attributes this to people drawing from their savings to meet consumption demands. As savings are gradually used up, consumption is expected to drop more dramatically next year.

Depending on the outcome of the troika’s second review, the island will become eligible for the next tranche of bailout cash.

The lenders’ first report had identified a number of risks to the full implementation of the rescue programme, such as the continued low confidence in the banks and risks of lower than expected revenue from privatisations.

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