Lagarde’s Cyprus visit at ‘important time’ for EU, central bank says

The visit to Cyprus this week by the president of the European Central Bank (ECB) Christine Lagarde comes at “a particularly important time” for the European Union and the Eurozone, the central bank said on Monday.

Lagarde arrives in Cyprus on Tuesday for a series of meetings the following day that include Central Bank Governor Constantinos Herodotou and President Nicos Anastasiades. Following those meetings, she will also address a conference on the future of the European economy and current challenges.

An announcement from the central bank on Monday said the visit comes at “a particularly important time” for the European Union and the Eurozone.

“The visit of the President of the European Central Bank, Christine Lagarde, to our country is of particular importance… It is a unique opportunity to discuss and listen to President Lagarde, especially at this unprecedented time,” Herodotou said.

Ahead of the visit, Lagarde, in an interview with Phileleftheros published on Sunday, said she was optimistic that Cyprus “by showing the flexibility it has shown many times” could face the current difficulties as a result of geopolitical upheavals “and will emerge even stronger”.

Lagarde said challenges could also be viewed as 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.

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, improving solvency and liquidity positions and reducing problem assets such as non-performing exposures.

“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.

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.