Cyprus is ready to react to any spillover from the crisis in Greece, the governor of the island’s central bank said on Tuesday, adding the two countries were decoupling in the eyes of international markets.
Chrystalla Georghadji’s written remarks, sent on Tuesday in response to questions from Reuters, underline concerns among Cypriot policymakers amid heightened uncertainty over Greece’s future in the euro zone.
“The path of Cypriot bond yields is diverging from the corresponding path of Greek bonds, reflecting the decoupling of the two economies in international markets.”
Greek five-year government bond yields are trading around 15 per cent, reflecting the risk premium of the investment, while the nearest Cypriot equivalent, a bond maturing in 2020, yields less than 3.5 percent.
Cyprus’ financial sector was effectively ring-fenced from Greece in early 2013 when the island’s banks were forced to sell off their Greek branches in order to protect Athens from turmoil in Cyprus around the time of the island’s international bailout.
Georghadji’s remarks echo those of politicians on the island, who want to reverse a perception that the two countries are inextricably linked, worried that Cyprus could be dragged down with Greece should Athens’ finances collapse, forcing it out of the euro.
Business and cultural ties between the countries remain strong, and Cyprus’ ability to withstand major contagion from any Greek default or exit from the single currency could prove an important test of the durability of the euro zone and the wider European Union.
Unlike Greece, Cyprus has been largely diligent in implementing reforms required in return for the international bailout it received in 2013. There has been little public protest despite the deep recession that ensued.