articles | 02 July 2015

Adjustment programme to shield Cyprus from Greece

Cypriot authorities can prevent a contagion of the Greek crisis to Cyprus by continuing to implement the economic and financial reform programme, says economist Michalis Florentiades.

“The Cypriot government finds itself in a position where it is necessary to combine its domestic priorities of implementing the memorandum and the ongoing Cyprus Problem negotiations, with the need to play a positive and constructive role for the resolution of the Greek debt crisis,” Michalis Florentiades, chief economist at online financial service provider XM.COM said.

“It should be monitoring the situation closely, in cooperation with its other European Union partners and EU institutions and particularly the European Central Bank, in order to prevent contagion. I believe the signal that Cyprus is successfully implementing its memorandum and is on course to return to the markets next year, would be the most appropriate response”.

Elena Constantinou, who heads the asset management division of Ultimate Performance Management, a Nicosia-based financial service company, said that since a possible impact from the current Greek crisis to Cyprus can result via three main channels, trade, psychology and banking – through the operation of units of Greek banks on the island – it may have to take precautionary measures in all areas and if deemed necessary more drastic action to prevent a spill-over.

Cyprus, which is currently the only euro area member in an adjustment programme, requested a bailout in June 2012 and agreed its terms nine months later, after its banks suffered a €4.5 billion write-down on Greek government securities in Greece’s 2011 debt restructuring. Greece’s half-completed programme expired on June 30, after the country which lost access to markets in 2010 and lapsed a €1.5 billion debt repayment to the International Monetary Fund on Tuesday, broke off cash-for-reforms negotiations on Friday.

Ireland and Portugal, the two other bailed out countries of the euro area already exited their respective programmes after restoring market access in December 2013 and May 2014 respectively. Greece ordered an extended bank holiday on Sunday and imposed capital controls after the European Central Bank decided on Sunday to maintain the liquidity lifeline to Greek lenders unchanged as depositors increasingly emptied their accounts fearing the Greek government’s delay in agreeing with creditors a new programme may force the country to ditch the euro in favour of the drachma. The government under prime minister Alexis Tsipras, leader of the radical left SYRIZA party, came to power in January after promising to abandon austerity policies and renegotiate the country’s bailout terms.

Cyprus’s finance minister Harris Georgiades told lawmakers of the House finance committee that the euro area is on alert to prevent a contagion of financial instability from Greece, according to the Cyprus News Agency.

Asset manager Constantinou said that the Cypriot “government could do more” in order to maintain the supply of energy products and medicine imported from Greece in case of shortages. “The government should ensure that there is enough supply for the immediate future and at the same time should push forward new arrangements via other countries,” together with the private sector, she said.

In addition, Cypriot authorities should also put “simple mechanisms” assigned with the task of preventing profiteering, she said.

“If today Cyprus still had capital controls, it would be difficult to lift them when Greece was just adopting them,” she said adding that in that case Cyprus and Greece would receive a similar treatment, which could delay their lifting “for years”.

“With this move and the subsequent successful new 7-year bond issue, the country has managed to ‘separate’ itself from Greece, which is now clearly acknowledged by the institutions,” such as the IMF and the EU, which “openly compliment Cyprus as a success story,” she added.

The 7-year bond issued on April 28 at an average yield of 4% was traded this morning at a price of 100,592, which translates to a secondary market yield of 3.78%, according to a Bank of Cyprus document obtained by the Cyprus Business Mail.

Even as “the impact from Greece will be minimal” for the Cypriot economy, its growth “depends largely” on the implementation of reforms including tackling non-performing loans or privatisations, agreed as part of Cyprus’s bailout, Constantinou said.

The Cypriot government, which aims at issuing new debt in the second half of the year before the financing period of its programme expires in March and is also facing political resistance to its privatisation programme, could also request a credit-line, just in case, should there be delays in the implementation of agreed reforms.

Finally, Constantinou said that Cypriot authorities should also be prepared to take drastic measures in case it was deemed necessary toprevent a new spillover of the Greek crisis through the banking system.

The ring fencing of subsidiaries of Greek banks operating in Cyprus “was necessary and now proven sufficient to avoid any contagion risks from Greece,” Constantinou said. “For the Greek subsidiaries there is still a bank-run risk if depositors perceive that their deposits are at risk and under that scenario it is expected that the Central Bank and the Ministry of Finance will act swiftly arranging their acquisition by other institutions”.

George Syrichas, executive board member of the Central Bank of Cyprus, told lawmakers of the finance committee today that the supervisory authority asked Αlpha Bank Cyprus Ltd, Eurobank Cyprus Ltd, National Bank of Greece (Cyprus) Ltd and Piraeus Bank (Cyprus) Ltd to eliminate their exposure to risks related to Greece, according to the Cyprus News Agency.

The central banker added that the authority has prepared contingency plans for every scenario, according to the CNA.

Source: Cyprus Mail

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