16/01/2013 11:00
Central Bank Governor, Panicos Demetriades warned that a possible haircut of the Cypriot debt could undermine the investor confidence in Cyprus and the wider euro area.
In his interview to the Associated Press on Tuesday, Mr. Demetriades stated that talk of a Cypriot debt writedown — or ‘haircut’ — similar to that made by Greece shouldn’t even be taking place.
“In Greece’s case, private sector investors were forced to take losses on their holdings of Greek government bonds, a step that the other 16 eurozone countries insisted would remain a one-off for fear of scaring away investors’.
“Haircuts of any kind will not help,” Demetriades said in an interview. “Discussions undermine the prospect of recovery and threaten the stability of the euro area, not just Cyprus”, he said.
Mr. Demetriades said that Cypriot banks will need at worst “less than €10 billion ($13.33 billion)” in rescue money, less than some had forecast recently.
“The problem is that if the banks require the full €10 billion — a figure more than half the country’s €17.5 billion ($23.32 billion) gross domestic product — the government may be overwhelmed by the rescue loans it will have to pay back”, he stressed.
If the debt is deemed unsustainable, the country would have to take tougher measures to solve its financial problems, such as deeper cuts to salaries and more tax increases.
Mr. Demetriades said he “doesn’t share those gloomy scenarios” because they are based on worst-case assumptions of a deepening recession in Europe and beyond that he says have little chance of happening.
“If the rest of the euro area is doing better, the chances of the adverse scenario materializing for Cyprus are less,” adding that the country can rebound from crisis because of good growth prospects in such sectors as tourism, shipping and as a result of the recent discovery of significant natural gas deposits off its shores.
Mr. Demetriades said Cyprus would move ahead with privatizing state-owned companies if it’s deemed necessary to make its debt viable, despite political resistance at home, because it’s part of the terms the country agreed in a draft bailout accord with the European Commission, the European Central bank and the IMF.
He said Cyprus was more likely to sell the telecommunications company CyTA than the electricity or ports authorities due to “national security considerations” over the country’s ethnic division that came about in 1974, when Turkey invaded after a coup by supporters of union with Greece.
Money laundering reports greatly exaggerated
In his interview, the CB Governor referred to German press reports that Cyprus is used by Russian oligarchs for money laundering.
Mr. Demetriades dismissed such reports as “greatly exaggerated” and “fueled by political considerations in other countries,” a veiled reference to Germany, where politicians have raised objections to the bailout.
“Cyprus has done as much as other countries in the euro area to combat money laundering and we are very serious about enforcing the legislation,” he said.
“Cyprus stands to gain from an agreement by eurozone countries to set up a mechanism which would recapitalize banks directly instead of through governments in order to not overwhelm public finances with new debt. The mechanism is expected to be up and running next year and Demetriades said a decision on whether it would apply retroactively to Cyprus will be coming “in the next few months”, he added.
Mr. Demetriades said the draft bailout deal doesn’t foresee an increase to Cyprus’ low corporate tax rate of 10 percent, which country has used as a major selling point to attract business. Hundreds of companies have taken advantage of the rate to set up shop in the country.
He also dismissed speculation that more, tougher austerity measures may be needed to clinch approval for the bailout from fellow Eurozone states.
“If we start messing around and adding more measures, there is a risk that the program becomes less consistent, there is a risk that the recovery won’t happen as predicted,” Mr. Demetriades concluded.
In his interview to the Associated Press on Tuesday, Mr. Demetriades stated that talk of a Cypriot debt writedown — or ‘haircut’ — similar to that made by Greece shouldn’t even be taking place.
“In Greece’s case, private sector investors were forced to take losses on their holdings of Greek government bonds, a step that the other 16 eurozone countries insisted would remain a one-off for fear of scaring away investors’.
“Haircuts of any kind will not help,” Demetriades said in an interview. “Discussions undermine the prospect of recovery and threaten the stability of the euro area, not just Cyprus”, he said.
Mr. Demetriades said that Cypriot banks will need at worst “less than €10 billion ($13.33 billion)” in rescue money, less than some had forecast recently.
“The problem is that if the banks require the full €10 billion — a figure more than half the country’s €17.5 billion ($23.32 billion) gross domestic product — the government may be overwhelmed by the rescue loans it will have to pay back”, he stressed.
If the debt is deemed unsustainable, the country would have to take tougher measures to solve its financial problems, such as deeper cuts to salaries and more tax increases.
Mr. Demetriades said he “doesn’t share those gloomy scenarios” because they are based on worst-case assumptions of a deepening recession in Europe and beyond that he says have little chance of happening.
“If the rest of the euro area is doing better, the chances of the adverse scenario materializing for Cyprus are less,” adding that the country can rebound from crisis because of good growth prospects in such sectors as tourism, shipping and as a result of the recent discovery of significant natural gas deposits off its shores.
Mr. Demetriades said Cyprus would move ahead with privatizing state-owned companies if it’s deemed necessary to make its debt viable, despite political resistance at home, because it’s part of the terms the country agreed in a draft bailout accord with the European Commission, the European Central bank and the IMF.
He said Cyprus was more likely to sell the telecommunications company CyTA than the electricity or ports authorities due to “national security considerations” over the country’s ethnic division that came about in 1974, when Turkey invaded after a coup by supporters of union with Greece.
Money laundering reports greatly exaggerated
In his interview, the CB Governor referred to German press reports that Cyprus is used by Russian oligarchs for money laundering.
Mr. Demetriades dismissed such reports as “greatly exaggerated” and “fueled by political considerations in other countries,” a veiled reference to Germany, where politicians have raised objections to the bailout.
“Cyprus has done as much as other countries in the euro area to combat money laundering and we are very serious about enforcing the legislation,” he said.
“Cyprus stands to gain from an agreement by eurozone countries to set up a mechanism which would recapitalize banks directly instead of through governments in order to not overwhelm public finances with new debt. The mechanism is expected to be up and running next year and Demetriades said a decision on whether it would apply retroactively to Cyprus will be coming “in the next few months”, he added.
Mr. Demetriades said the draft bailout deal doesn’t foresee an increase to Cyprus’ low corporate tax rate of 10 percent, which country has used as a major selling point to attract business. Hundreds of companies have taken advantage of the rate to set up shop in the country.
He also dismissed speculation that more, tougher austerity measures may be needed to clinch approval for the bailout from fellow Eurozone states.
“If we start messing around and adding more measures, there is a risk that the program becomes less consistent, there is a risk that the recovery won’t happen as predicted,” Mr. Demetriades concluded.
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