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Cyprus

Reform must continue after the troika leaves, minister warns

Finance Minister Harris Georgiades

By Elias Hazou

PEOPLE should not expect their everyday lives to change for the better overnight once Cyprus exits the economic adjustment programme, and structural reforms must continue beyond that date to ensure the island never again has to resort to outside assistance, Finance Minister Harris Georgiades has said.

In a two-part interview published by Simerini, Georgiades conveyed cautious optimism that the economy would slowly but surely start to rebound.

Citing government forecasts, he said the unemployment trend would begin to reverse by 2015 and the joblessness rate contract, for the first time since 2008, on the back of slight economic growth.

The 2015 budget – which the government is currently drafting – seeks to further reduce the deficit and place public finances on a better footing.

The budget will not necessarily be an austerity budget, as in the last few years, Georgiades said. Rather, it will provide for expenditure increases in certain targeted areas, such as co-financed development projects and social cohesion programmes.

“It is, I believe, a budget of exit from the depression and if ultimately we remain committed on a political level, we shall also succeed in leaving behind the memorandum,” he added, without specifying when that might be.

Asked to elucidate what the end of the adjustment programme means for the country, the minister said the government will be able to finance its operations on its own, without relying on third parties.

The correction of the economy will have positive knock-on effects, such as boosting foreign markets’ confidence in Cyprus.

However, he stressed, the government is intent on pursuing reform and structural changes even without the troika.

On the troika’s perceived meddling in domestic affairs, the minister said the frustration with this state of affairs is justified, but recalled that it is Cyprus that asked the international lenders to bail out the island, due to mistakes committed by Cypriots, such as unsound management of public finances and a reckless credit expansion, for which both commercial banks and financial and monetary regulators were at fault.

“We had the highest private debt ratio in Europe. Some people were back then describing the situation as an economic miracle. In reality, the boom was artificial, it was based on non-viable borrowing, essentially it was a bubble,” said Georgiades, adding that the banks and regulators have hopefully learned the lessons from the meltdown of 2013.

On the issue of the foreclosures legislation, which remains in limbo, the minister reiterated that the largest threat comes not from the non-disbursement of the next bailout tranche, but rather the very possible loss of confidence abroad in the Cyprus economy, although this has not happened for the time being.

Georgiades opined that the repossessions law tabled by the administration will not lead to mass, indiscriminate foreclosures, as claimed by critics.

Staying on this point, he said that the troika of lenders will not come to a decision regarding the next aid tranche until the issue of the foreclosures-related bills – four are being contested in the Supreme Court – is comprehensively settled.

On the recent noise after banks sent out letters to borrowers asking that they settle their debts, Georgiades suggested this may have been blown out of proportion.

It appears, he said, that the banks were contacting borrowers with non-performing loans and reminding them of the need to meet their obligations.

Georgiades appealed to lenders and borrowers alike to engage in the restructuring of loans – the only way to resolve over-lending, the chief problem plaguing the economy.

The minister said he was comfortable with the fact that, as finance minister he may not be a popular figure. And he was determined on continuing the policies of the government whatever the political cost.

Asked whether the cooperative banking sector is in need of further recapitalisation, Georgiades said this would depend on the result of ongoing EU-wide bank stress tests.

Co-op banks were nationalised in December 2013 with the state injecting €1.5bn in taxpayer money – part of €2.5bn earmarked for banks in the €10bn bailout.

That leaves a ‘cushion’ of €1bn should the cooperatives require additional capital. The funds may be diverted to the cooperatives should they come up short of EU capital requirements pending the findings of the stress tests.

Should cooperatives need an extra boost, then only that amount needed – not the entire €1bn – would be channelled to them, Georgiades explained.

On whether at the moment the cooperatives need more funds, Georgiades said he had no such information.

But in the event that no extra funds are needed, Cyprus would not absorb any of the €1bn so as not to further burden the national debt.

Eurozone banks are required to hold 8.8 per cent of core tier 1 capital under the baseline scenario, and 5.5 per cent under the adverse scenario.

The Cooperative Central Bank held 12.1 per cent of core tier 1 capital at the end of the 2013, but has yet to post its results for the first six months of this year.

Bank of Cyprus has reached a core tier 1 ratio of 15.1 per cent following a €1bn capital increase.

 

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