articles | 16 December 2014

Central Bank tells banks to restart lending to kick-start economy

The Central Bank of Cyprus has called on the banking system to resume its lending role and help kick-start the ailing economy.

In its monthly economic bulletin for December, the central bank said that the successful completion of the European Central Bank stress tests by four lenders in October “is one of the most favourable developments of the past year.”

This, and the implementation of a number of reforms, “repositions the banking system on healthy foundations and gives the opportunity to the banking sector to focus on its basic role and contribute decisively to the economic recovery of Cyprus,” the CBC monthly report said.

“The healthy and sufficiently capitalised banks will be in a position to provide viable loans to households and small to medium sized enterprises that are the driving force of the country’s economic activity.”

The CBC report added that the systemic lenders have raised their capitalisation levels to “a very satisfactory, under the circumstances, degree with prospects of further strengthening, while the banking regulatory and supervisory framework has also been enhanced.”

The bigger banks, it said, are proceeding with their restructuring plans, while the introduction of corporate governance has improved and the changes will be on going.

After these development, the CBC said that it will be able toconcentrate its efforts on the restructuring of loans, which “should be reasonable, fair and viable”, which will on the one hand help lower the level of non-performing loans (NPLs) and on the other have a positive impact on interest rates and the economic climate in general.

As regards the real economy, and in particular the rate of change of the real GDP, the developments, although still negative, seem to be better than expected, the CBC said.

While the predictions within the conclusions of the fifth review of the economic adjustment programme with the Troika of international lenders in June had expected a recession of 4.2%, the most recent revised reviews of the IMF and the European Commission see a contraction of real GDP by 3.2% and 2.8%, respectively. According to the latest data, the CBC estimates this contraction to end up at 2.6%.

During their fifth review, the international lenders predicted a public sector deficit in 2014 of 4.7% of GDP. However, this estimate has already been surpassed, as according to the revised IMF and EC projections the surplus is seen at 4.4% and 3%, respectively. These revisions make the fiscal estimates for 2015 more promising, considering, of course, that the consistent and prudent implementation of the state budget will continue.

As regards the fifth review, however, last October saw the first delay in the implementation of the economic adjustment programme, according to the MoU.

“As a result, the fifth review was not completed in time and the consequent financing of €436 million was not paid as planned,” the CBC said.

It added, “The reasons that led to the delay, i.e. disagreements over the legislation on foreclosures (the passage of which is an MoU obligation), should be resolved so that the funding will go ahead in the near future.”

The developments so far in the banking sector, the public finances and the economy create positive prospects for the country’s exit from the crisis, the CBC report said. This is also highlighted in the analyses of the rating agencies that recently proceeded with upgrades of the Cyprus economy. These also reflect on the gradual, yet stable, recovery of the credibility the markets see in the Cyprus banking sector and the economy in general.

However, this is not enough and should not lead to complacency. The ultimate aim is the full rehabilitation of trust in the economy, securing healthy macroeconomic conditions and achieving a viable development within conditions of full employment, the CBC report concluded.

Source: Financial Mirror

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