Cyprus Mail

Cyprus Central bank head says ready to act if Greece spills over

CB Governor Chrystalla Georghadji

By John O’Donnell and Michele Kambas

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.

She sought to distance Cyprus from Greece, saying that the close links between the countries’ financial sectors had weakened considerably.

Cyprus is no longer at high risk from financial developments and uncertainty in Greece,” Georghadji said.

“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.

She cautioned, however, about the psychological impact of problems in Greece. “We remain vigilant and ready to react to any adverse spillover,” she said.

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.

Now, with the Cypriot economy recovering and Greece sinking deeper into financial trouble, the situation has reversed.

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.

Greek Prime Minister Alexis Tsipras has said that he would have to resort to a referendum if lenders insisted on demands deemed unacceptable by his leftist government, elected to scrap austerity.

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.

Their paths have diverged more sharply since the radical leftist Syriza party won power in Greece in January, denouncing austerity and demanding a reduction of its official debt.

The centre-right Cypriot government blames former Communist President Dimitris Christofias for delaying a cleanup of Cypriot banks that made the eventual bailout more painful.

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