Cyprus is striving to get back to business as usual after securing a financial bailout package, what are the immediate priorities of the Ministry of Finance?
After the recent Eurogroup decisions on financial assistance, Cyprus aims to restore confidence in its economy and especially in its banking sector. We aim to achieve this through the strict and full implementation of the Memorandum of Understanding (MOU), which is based on three pillars, fiscal and structural measures and measures to restructure, recapitalise and supervise the banking sector.
We also aim to promote a number of structural reforms that have not been implemented for decades and will be conducive to economic growth, such as pension reform, the introduction of a three-year budgetary framework and the modernisation of public and tax administration.
In parallel to the full implementation of the MOU, the government aims to implement specific measures to boost economic growth and foster employment. These measures include employment support schemes in particular for vulnerable groups, the acceleration of casino licensing procedures, the extension of the tourist season by two months through targeted support programmes and the acceleration of the implementation of golf course projects. Also among these measures are the establishment of a national guarantee scheme for providing loans to SMEs and the better utilisation of EU structural funds.
Cyprus was the fifth EU country to request financial assistance, do you feel Cyprus received fair treatment in this process compared to other member states? What impact will the terms of the MOU have on the wider economy of Cyprus?
The government of Cyprus had repeatedly expressed strong opposition to the imposition of any haircut to depositors. We clearly expressed the view that program funds should have been earmarked for the recapitalisation of the banking system, as was the case in other EU countries. Instead, the Eurogroup decided to bail in uninsured depositors. In this sense, we indeed feel that Cyprus did not receive fair treatment. This decision has severe negative implications, in particular in the short term. Economic growth is being heavily affected and this is being reinforced by the continuing negative external environment and the necessary fiscal adjustment. Already activity is subdued and unemployment is rising rapidly.
Painful measures have been imposed on the banking sector, what are the short and long term effects of winding down Laiki Bank and the restructuring of the Bank of Cyprus? How have the other banks in Cyprus been affected?
All Cypriot assets of Laiki Bank have been transferred to Bank of Cyprus, together with all insured deposits and ELA obligation of around €9 billion. All employees of Laiki Bank have also been transferred to Bank of Cyprus. Therefore, those who borrowed from Laiki Bank and insured depositors will now be serviced by Bank of Cyprus. This is currently done through the previous network of Laiki Bank until the operational merger of the two banks takes place.
Uninsured depositors of Laiki Bank have remained with the legacy entity and will be partly reimbursed through the proceeds of the future liquidation. The legacy Laiki has provisionally obtained 20% of the share capital of the enlarged Bank of Cyprus and also holds some foreign assets, mainly relating to the overseas subsidiaries of the legacy entity. The depositors of Bank of Cyprus have seen part of their uninsured deposits converted into share capital. The initial amount of deposit to equity conversion stands at 37.5%. An additional amount, equal to 22.5% of uninsured deposits has been frozen and is available for conversion should this be needed, following the assessment of an independent external evaluation.
The above measures have impacted depositor confidence as well as other credit institutions. Theupheaval created between the two Eurogroup decisions, including the bail-in of depositors, has created the need to impose temporary capital controls to the banking system. However, a fact often overlooked is that out of around 40 banks operating in Cyprus only two banks have been directly affected by these developments.
There is no doubt that the measures imposed on the banking sector have adversely impacted the wealth of Cypriot depositors as well as foreign depositors, who may in the future choose to direct their business operations to other jurisdictions. The reduction in wages and voluntary early retirement plans to be implemented in Bank of Cyprus and Laiki Bank will no doubt increase unemployment and reduce disposable income, with associated effects to the economy in general. That said, there were no riots against credit institutions and the banking system continues to operate smoothly.
The short term effects include a disruption in the liquidity position of the banks stemming from reduction of confidence in the banking system, which is managed by the imposition of temporary restrictive measures.
The capital controls imposed on the banks are said to be temporary, why were they necessary and when will they be lifted?
The capital controls are considered temporary and necessary, and were imposed to prevent significant capital outflows following the Eurogroup decisions regarding the resolution of the second largest bank in Cyprus and the bail in of uninsured depositors. However, currently 16 foreign banks have been completely exempted from capital controls and we are working hard to completely lift controls as soon as the confidence in the Cypriot banking system is restored to a satisfactory level.
How will the public debt of Cyprus be managed and how would you respond to concerns that Cyprus will not be able to pay back its loans?
According to the MOU agreed with the Troika, the public debt of Cyprus will be sustainable if a number of pre-conditions are satisfied in the future. These include the achievement of primary surpluses by 2017, positive economic growth and stability in the banking sector. Without a doubt, the path in front of us is challenging but the government stands ready to adopt all the necessary measures, including painful decisions. It is important to add that the terms of the loan to Cyprus by the ESM and IMF are very favourable, with low interest rates and relatively high average maturities.
What does the future hold for Cyprus as an international business centre, will it be able to overcome the current crisis and regain the trust of the global business community?
Admittedly, the decisions taken by the Eurogroup for the financial assistance to Cyprus created a crisis of confidence, especially for its banking sector. Under these very challenging conditions, our policy responses have to be both effective and timely. We are fully aware that time is of essence and any delays will not be in our favour. An overarching goal for us is to take measures to bring stability back to the banking sector. Having said that, I would emphasise that the underlying reasons that have played a significant role in establishing Cyprus as an international business centre, such as its strategic location, the sophisticated infrastructure, the highly educated workforce, the favourable tax system, are still present. One of the main strategic pillars of economic policy of this government is to maintain those advantages and further improve economic competitiveness. The key is to implement structural reforms included in the MOU and also in the EU2020 Agenda. The message I would like to convey is clear: Cyprus was and will remain a reputable and a reliable international business hub. Cyprus still offers substantial comparative advantages to foreign investors seeking a place to conduct business.
Financial and business services have traditionally accounted for the lion’s share of the country’s economic output. How will you seek to restructure the economy and what sectors will Cyprus now look to develop?
Apart from maintaining and improving the comparative advantages of Cyprus, we aim to promote other high value-added economic areas, such as green economy. Green growth must be part of the effort to restart the economy and it will contribute to the enhancement of competitiveness and to the further development of business activities. The government recently announced a number of decisions, for which their full implementation is expected to result to annual fuel savings amounting to €51 million, annual savings of €2 million from the reduction of pollutant emissions and the creation of 650 or more jobs. In the medium and long term, the outlook for Cyprus is more encouraging. With the recently announced offshore natural gas discovery, Cyprus is expected to be transitioned to a new era. We are currently handling this issue with a high degree of responsibility, also taking into account geopolitical factors. We intend to draw a comprehensive action plan for the management of all issues regarding our energy policy.
What are the key economic challenges Cyprus will face in the next five years?
Without a doubt, the major challenge ahead of us is to bring stability in the hard-hit banking sector, to ensure it can resume its normal activity as an intermediary organisation providing liquidity to the economy. Cyprus has to achieve a significant fiscal adjustment as agreed with the Troika partners. Specifically, we have to achieve a primary surplus of 4% of GDP by 2018 under negative economic conditions, which complicate and magnify the effort required. In the real economy, achieving positive economic growth will be a major challenge. The external economic environment is still negative, the government has to implement the necessary fiscal adjustment and the banking sector is facing problems. All these unavoidably will have an adverse impact on economic growth, but also on unemployment, which has increased to unprecedented levels.
What message would you like to give to the international community about Cyprus and its future?
Cyprus’ economy has proven in the past its capability of successfully confronting challenges. We are aware of the challenges and the difficult times ahead, but are both willing and determined to act in a decisive and a timely matter. We have no other option but to undertake all the necessary measures to achieve what our citizens demand from us, to live with dignity and pride. We will also adopt measures to safeguard the trust of the international business community in Cyprus’ economy.
BIO
Harris Georgiades was appointed Minister of Finance of Cyprus on 3 April 2013 by President Nicos Anastasiades. He was elected as a Member of the Parliament with the Democratic Rally in May 2011 and served as a Member of the Committee of Financial and Budgetary Affairs, the Watchdog Committee and the Committee of Communications and Public Works. He has served as Chairman of the Democratic Rally Young Graduates and as Director of the Democratic Rally President’s Office. During 2009-2013 he served as press spokesman of the Democratic Rally and was also the Deputy Head of the Economic Policy of the Party. He has also been professionally involved in the tourism sector. Georgiades studied Economics and International Relations and European Studies at the University of Reading, UK.
