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CY: Three objectives with the troika

15/07/2013 06:36
The achievement of a solution for the balance sheet of Bank of Cyprus, the arrangements that will allow the lifting of restricting measures and the avoidance of new fiscal measures are the three objectives of the Cypriot authorities in view of troika’s arrival to Cyprus for the first assessment of the program.

Since March, when the Eurogroup decided to bail-in of the insured depositors in the two large banks, enough have been done.

So far

On the financial part, BOCY absorbed Cyprus Popular Bank, has interim CEO and Board and prepared a plan for downsizing staff to the desired levels. It started applying the new methodology for non-performing loans and finalized with the troika that the amount of capital needs of the Cooperatives will not exceed €1.5 billion.

On the fiscal part, there were cuts of the refugee benefits, low wage cuts and procedures for registration of the state properties. The numbers until the end of May show that the main fiscal target to reduce the primary deficit to €222 million is achieved though, partly, because of the extraordinary income from the second EEZ licensing.

Where is the lag

Despite the progress achieved, the financial part of the program has been delayed and this will not go unnoticed by the troika.

The government is strongly concerned that Bank of Cyprus is still in resolution regime and that the system has not yet stabilized, with significant deposit outflows.

The appointment of the Board and CEO was considerably delayed and the assessment of BOCY’s assets will be completed one month later.

The restrictive measures remain in force currently and there is no clear prospect for their removal yet.

The transfer of supervision of the Cooperatives to the CB is at least two months back, as the law passed on Thursday seems to be an interim solution in relation to this that the troika called for a until the end of May.

The Coops’ effort to raise capital on their own before applying to the mechanism, also seems to be delayed.

Fears for severer recession

The uncertainty in the banking system and the restrictions on capital movements raise concerns that the recession will be longer than the 12.5% expected by the troika by the end of 2014.

In this case, the contraction of revenues will be such that will bring tighter fiscal measures than those already included in the memorandum.

The data released until today show that in some areas such as real estate, cars and retailing shrinkage is much greater than the 8.5% expected for this year.

The economic confidence indicator of the University of Cyprus, however, does not show such a thing.

The Cypriot authorities estimate that, given the initial shock, macroeconomic data remain within the troika’s estimates.

They are optimistic that with these data new measures may not be necessary. This was also stated on Friday by President Anastasiades, expressing optimism that Cyprus will achieve the goals of the assessment and it will not proceed with wage cuts of more than 3% already decided in 2014.

Given the Ministry's intention to cut spendingby €700 million in 2014, it remains unknown where additional reductions will emerge from, since only a small part of cuts stems from the payroll.

The program of Cyprus includes specific measures for 2013 and 2014, but not for 2015 onwards. For this period, measures are needed are close to 5% of GDP and are not yet determined.

The program

Part of the troika delegation arrives in Cyprus today and contacts arw starting from tomorrow. Things will begin to clear up on Wednesday when the Minister, the Governor and the heads of the troika will meet to discuss the course of the program.

Another meeting will be held on Saturday at a higher level, this time to discuss solutions to improve the balance sheet of Bank of Cyprus. The troika may be handed the preliminary results of the assessment of the Bank's assets, conducted by KPMG. Early indications from assessment show that there will be no surprises in relation to Pimco’s report.

As written by StockWatch, among the solutions to be proposed on Saturday to ease the bank's balance sheet will be the creation of a real estate bank, which will manage the assets of the bank, including the collateral for part of the extraordinary liquidity transferred from Cyprus Popular Bank.

The aim is to stabilize the situation in the bank, so as to build a positive climate in the banking sector.

Another important objective is to convince the troika to lift the restrictive measures in the system and to establish procedures to allow the seamless provision of liquidity to the system in such a case.

The broad aim of the Cypriot authorities will be to convince that they implement the program properly, despite unexpected delays encountered along the way.

The troika delegation will leave at the end of July. The Eurogroup is expected to make a decision on disbursement of the next tranche, which includes the amount that the Coops will need, in September.

The next assessment will be in three months, the Cypriot authorities expect that the first assessment will lay the foundations for positive treatment of the creditors.