FINANCE minister Harris Georgiades was entitled to feel proud of the fact that another review by the Troika was completed with success. This showed the government’s commitment to the memorandum and determination to put state finances in order – the country had met all fiscal targets with a considerable margin.
One European Commission official said: “Cyprus is clearly outperforming on the targets that had been set at the beginning of the programme. I can also say that that is quite unusual in programme countries. It is not the general experience that we have and we’ve had before. Ireland is the example that targets were met, but on the fiscal side I do not recall having seen actual targets being outperformed. That is, I think, very encouraging.”
While this is indeed encouraging and shows the government as trustworthy and reliable, it says very little about the prospects of the economy. After all, fixing the fiscal side was always going to be the easy bit for the government. All that was required was number-crunching by finance ministry technocrats and the imposition of some spending cuts combined with tax hikes. There may have been a political reaction to the measures, but they were voted through the legislature because everyone accepted that they were necessary for the financial assistance to keep flowing in.
It is in the real economy and the banking sector that things are far from encouraging. As the lenders noted, in traditional Troika-speak, the banking sector “still faces significant challenges.” With NPLs at €26bn and a debt restructuring framework still to be put in place, the economy’s prospects remain bleak and the outperforming of fiscal targets is very small consolation. It certainly does not seem to justify the ‘significant’ relaxations to capital controls that Georgiades promised in the coming week.
The banking sector may be stabilising, but with NPLs of €26bn and no debt restructuring framework in place banks are still far away from operating without the protection of capital controls. The finance minister correctly believes that the sector’s return to normalcy would start only with the relaxation of controls, but as things are, a more cautious approach would be the better policy, at least for now. Uncertainty still hangs over the sector and there is no indication of how effectively it would deal with NPLs.
As the Troika said, referring to the prospects of a small recovery in 2015, “the risks to the outlook are substantial.”