articles | 04 June 2015

Cyprus has become an example to follow

Cyprus from an example to avoid has become an example to follow, Pierre Moscovici, EU Commissioner for Economic and Financial Affairs, Taxation and Customs Union said in an interview with CNA, adding that the Cypriot economy has made remarkable progress following two years of an adjustment programme.

Moscovici advised against an early exit from the adjustment programme, which in his words constitutes a protection for Cyprus, pointing out that there’s still work to be done in terms of programme commitments, such asprivatisations and public service reforms.

He also noted that an Asset Management Company, the so-called bad bank, would not solve the pressing problem of non-performing loans, which have to be restructured even if an AMC was in place.

The small island-state came at the brink of collapse in early 2013 prompting the then newly-elected government to conclude on a €10 billion financial assistance programme that included a controversial conversion of banking deposits over €100,000 to equity to recapitalise Cyprus' largest bank, whereas the island`s second largest lender has been wound down.

The banking system was decimated forcing the authorities to impose capital controls to avert a bank run. However two years on, the country is slowly emerging from the crisis, the economy over performed its initial bleak projections and has recorded economic growth after a 14-quarter recession.

“I would say that Cyprus has made remarkable progress since the programme was launched. I was there in 2013 when we had some dramatic decisions to take. I think that Cyprus has become an example to follow rather than an example to avoid and of course this is quite an achievement given the situation in 2013,” Moscovici said.

He recalled that the island’s financial systemwhich back in 2013 was “on the brink of ruin” has been stabilised and recapitalised, capital controls have been lifted, public finances are back on track, enabling Cyprus to tap the international bond markets, and public debt, which currently is at 107% of GDP is set to be lower next year.

“So, yes my first observation is remarkable achievement,” the French Commissioner said, stressing however “Cyprus now needs to ensure it stays in the course of reform for the remainder of the programme and beyond.”

He cited public administration reform, privatisations and reducing non-performing loans stock, which is among the highest in the EU as the key steps to be taken.

Responding to a question, Moscovici said that Cyprus will not use all €10 billion from its financial assistance package, due to “impressive fiscal performance” and because banks covered their projected capital shortfalls without resorting to the €2.5 billion earmarked for bank recapitalisation, except from the Cooperative Central Bank that has been nationalised as the government injected €1.5 billion from bailout funds to cover its capital shortfall.

As to whether the programme’s buffer could be used for funding the solution of the Cyprus problem, Moscovici said the European Commission is closely following the talks between President Anastasiades and the leader of the Turkish Cypriot community “and we find that it is encouraging that the talks resume.”

Expressing hope for “a sustainable solution to the long-lasting division of the island will be found,” Moscovici added that the Commission “stands ready to support the two communities in their efforts in this direction.”

On the prospects of the euro area and Europe, Moscovici noted that growth is picking up, as the Commission and the ECB have been working to correct root problems that pushed the continent in stagnation since 2008. Growth is picking up, while deflation with the help of the ECB’s massive Quantitative Easing programme returned to positive territory, he added.

But Moscovici noted that his job is to make sure that recovery is not due to cyclical but structural reasons.

On Greece, Moscovici said there is no plan B other than a stronger reformed Greek economy within the euro area.

“I now that Greece and Cyprus remain close partners especially in trade but I believe that we should and we will, we are working on the idea, to avoid any kind of Grexit, we have no plan B, other than Greece with a reformed and stronger economy in the euro zone,” he concluded.

Source: InCyprus

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