Ahead of visit, Lagarde optimistic Cyprus can weather current storm (Updated)

European Central Bank (ECB) President Christine Lagarde is optimistic that Cyprus will use the flexibility it has shown many times in order to face the current difficulties as a result of the geopolitical upheavals and will emerge even stronger.

In an interview with Phileleftheros published on Sunday ahead of her visit to Cyprus in the coming week, Lagarde said challenges were also opportunities.

Commenting on the loss of around 25 per cent of tourism from Russia and Ukraine, Lagarde said that the Cypriot authorities were doing the right thing by pursuing other markets.

She also pointed out the great importance of Cyprus’ participation in the Eurozone, which allows it to function as a hub for business activities for the Middle East and North Africa region.

On Russian interests in Cyprus, the ECB president said: “The direct exposures of the Cypriot banking sector to the Russian economy as a whole are relatively limited and continue to decline.”

She said significant progress has been made in recent years in stabilising the banking system.

“The Cypriot banking system is better prepared to cope with the current crisis,” Lagarde said, adding that Cyprus was in a completely different position today compared with her last visit ten years ago as IMF chief and the island has effectively addressed many of the problems it had in the past, she added.

“In recent years significant progress has been made in stabilising the banking system, improving solvency and liquidity positions and reducing problem asset (NPS) stocks,” she said.

Lagarde said the war in Ukraine would affect the Cypriot economy in various ways.

Given the importance of Cyprus as a centre for foreign direct investment to and from Russia, professional services, such as accounting, consulting and legal services, are also expected to be affected, while the economy will suffer from inflation higher energy prices due to the country’s dependence on oil imports for electricity generation.

“However, you know very well that every challenge is an opportunity. Cyprus is located at the eastern and southernmost tip of the EU. It provides a European institutional framework, the security of the euro as its currency, and serves as a hub for business in the Middle East and North Africa region. Your country has repeatedly shown that it is flexible and that it can face difficulties and emerge stronger,” Lagarde said.

Asked about the closure of RCB Bank’s banking operations, Lagarde said it was a business decision and declined to comment on the ECB’s position. It was important that all deposits be repaid, she said.

“In a way, this decision partially reduces the uncertainty and is expected to boost confidence in the Cypriot banking sector in the medium term,” she added.

Asked if there was a risk of a recession in the eurozone if the war continued, Lagarde said the war was expected to have a significant impact on the world economy, especially the European economy due to Europe’s proximity to Russia and dependence on Russian oil and gas.

The basic scenario of the ECB technocrats’ estimates, which includes “initial assessment of the effects of the war”, speaks of growth of 3.7 per cent in 2022 and 2.8 per cent in 2023.

She acknowledged that the war was likely to slow growth in the eurozone and push up inflation in the short term, but said ECB experts had worked out two alternatives, one unfavourable and one extreme.

“In the unfavourable scenario, the growth rate could fall to 2.3 per cent in 2022,” she said, adding, however, that these estimates were characterised by high uncertainty.