Governor of the Central Bank of Cyprus Panicos Demetriades said on Wednesday that the Cypriot taxpayer is now facing a bank bailout package that could be as high as €10 billion, which is equivalent to over 50% of Cyprus’s GDP, adding that as a proportion of GDP it is one of the largest bank bailouts ever, second only to the 1997 bank bailout in Indonesia.
The Governor of the Central Bank of Cyprus was addressing a discussion organised by the Hellenic American Bankers Association and the Cyprus-US Chamber of Commerce.
Demetriades referred to the financial and economic challenges currently facing Cyprus as well as the way forward to come out of the current crisis.
According to the Central Bank Governor at end-2012 the government debt-to-GDP ratio is estimated to reach 86% of GDP, which includes €1,8 billion for the support of Cyprus Popular Bank.
He said that in the case of Cyprus consumer and business confidence remain at very low levels, while a further contraction in economic activity is expected until 2014. More specifically, according to the latest CBC projections, which take into account the measures agreed with the Troika, real GDP is expected to record a contraction of 2,4% in 2012, while a further contraction is expected in 2013 and 2014 due to the impact of the fiscal consolidation measures set out in the Memorandum of Understanding (MoU).
He said that the draft MoU signed with the Troika of institutions, namely the European Commission, the European Central Bank and the IMF acknowledges that the Cypriot banking sector has been severely affected by the broader European economic and sovereign crisis, in particular through its exposure to Greece, however, it states that many of its problems are home grown and relate to overexpansion in the property market as a consequence of banks’ poor risk management practices and gaps in the supervisory framework that have led to significant under-provisioning.
It is important to note that banks could and should have done more to limit their exposure to Greece and their overseas expansion that is unrelated to core business and they should also have done a lot more to manage domestic loan portfolios, Demetriades noted, stressing that in particular, the banks should have done more to contain their exposure to the local property market.
The Central Bank Governor also noted that public finances have also deteriorated rapidly in the last few years. What has weighed heavily on public finances have been the successive downgrades by rating agencies, which have long recognised the contingent liability the large banking sector – imposed on the public finances, in light of its exposure to Greece that amounted to over 140% of Cyprus’s GDP, he said.
He noted that weakening domestic macroeconomic conditions have also contributed to the deterioration in public finances and the significant consolidation efforts made in the last year or so have not managed to correct the excessive government deficit.
Demetriades said that the Troika required Cyprus to embark on an economic adjustment programme aimed at restoring the health of the financial sector, continuing the on-going process of fiscal consolidation and to implement structural reforms that support competitiveness and sustainable and balanced growth, in exchange for financial assistance.
He explained that in the framework of the programme the banking sector will be thoroughly reformed and restructured in depth, become smaller, sounder and more resilient and the regulatory and supervisory framework for banks and coops will be enhanced.
Moreover, the on-going process of fiscal consolidation in order to correct the excessive general government deficit, and maintain fiscal consolidation in the medium term and to improve the efficiency of public spending will continue, said the Central Governor.
He added that the in the framework of the programme structural reforms to support competitiveness and sustainable and balanced growth, will be implemented.
He said that over the longer term the exploitation of natural gas discoveries should substantially boost growth prospects and help lower the debt burden of future generations.
Demetriades underscored that this is undoubtedly a difficult juncture for Cyprus, but it is encouraging that the agreement with the Troika has been expedited by substantial goodwill on all sides, i.e. government, political parties and other stakeholders.
He noted that everyone has shown understanding, willingness and flexibility for the purpose of adapting a programme of financial, fiscal and structural adjustment appropriate for the needs of the country.
The Central Bank Governor concluded by saying that he remains optimistic that the Cyprus economy and financial sector as a whole will recover and come out stronger from the current crisis and he explained that the economic adjustment programme should be seen as a catalyst that will reinforce macroeconomic and financial stability in the country.