These include a likely delay in the restructuring of the non-performing loan stock in the Cypriot banking system, which make out roughly half of the loan portfolio, the European Commission said in its seventh programme adjustment progress review. A low pace of restructuring non-performing loans “could lead to a slower than expected return of confidence in the banking sector, and thereby call into question the sustainability of the stabilisation of the banking system,” the Commission said.
An additional risk was “a prolonged period of tight credit supply conditions, which could weigh on the economic recovery,” the Commission said.
A further downside risk in the implementation of Cyprus’s programme, could result from reform fatigue, as well as insufficient policy measures or a deficient implementation of policies and a deterioration of macroeconomic and financial developments, which could lead to failure in achieving agreed primary surplus targets, the EU commission said.
A possible failure by Cyprus to implement structural reforms sufficiently, including the privatisation agenda could translate in lower than the expected revenue from the privatisation of state assets, the Commission added.
According to the terms of Cyprus’s bailout, the government aims at generating a total of €1.4 billion from the sale of government-owned enterprises and other assets, including the commercial operations of the Limassol port, the Cyprus Telecommunication Authority, known as CyTA, power producer Electricity Authority of Cyprus and state land.
A further downside risk for the successful implementation of Cyprus’s reform programme may result from a slower than projected economic recovery, “particularly in the medium term, related to slower than expectedprivate-sector balance sheet adjustment, worsening of labour market conditions and subdued real estate price developments,” the Commission said.
Possible spillovers from Russia and Greece, both major trading partners for Cyprus, could also affect economic activity, the EU Commission added.
While finance minister Harris Georgiades said on Friday that Cyprus was able to withstand Greece’s recent turbulence, the failure of Russian airline Transaero, which carried this year around three quarters of the incoming visitor flow from Russia, Cyprus’s second-largest tourist market, sent shock waves across the island a week ago.
The European Commission also said that there is a downside risk related to the ability of post-bailout Cyprus, which has well below investment grade sovereign rating, to successfully regain market access at a reasonable borrowing cost.
Source: Cyprus Mail
