articles | 26 November 2013

ECB: Cyprus banks no longer in crisis-fighting mode

The Cyprus banking system has shifted to crisis-resolution phase, according to Isobel von Koeppen Mertes, Advisor in the European Central Bank Market Operations Analysis Division, speaking at the Economist 9th Cyprus Summit, but needs to avoid some of the mistakes seen in Ireland.

Noting that “huge progress” had been made in stabilising the banking sector since March, von Koeppen Mertes said that Cyprus is “no longer in crisis-fighting mode but in the crisis-resolution phase”. Von Koeppen Mertes even reduced uncertainties about the forthcoming eurozone-wide bank stress tests. Asked what would happen if Bank of Cyprus did not pass the tests, von Koeppen Mertes said “I would be too worried about that”, noting that there were more concerns about banks elsewhere in the eurozone. The ECB official’s remarks were supported by Maarten Verwey, Deputy Director-General for Economic and Financial Affairs, European Commission, who said “I would not anticipate at this point in time that more money [capital] will be required, while adding that there were also “buffers” in the programme in view of the uncertainties. The details of the methodology stress test will only be known in January.

Despite noting progress, von Koeppen Mertes said that lessons must be learned from banking crises in other countries, noting that in Ireland the emphasis had been on “short-term forbearance measures” for non-performing loans rather than long-term resolution. This “created moral hazard”, led to a “wait and see attitude” even when debtors were able to service debt, and meant that non-performing loans were trending higher than expected. On the broad programme, the IMF Deputy Unit Chief of the European Department, Delia Velculescu, said that the Cypriot authorities “have demonstrated strong resolve”. The IMF official noted that “much has already been accomplished in the relatively short time frame” to address significant vulnerabilities in banking sector, unwind the deterioration in public finances and implement structural reforms. Velculescu noted that Cyprus had recorded a primary budget surplus through to the end of September and that the some results of structural reforms could already be seen.

“The recent review of the pensions system has confirmed its long-term viability,” she said and that reform of the wage-indexation mechanism known as COLA had led to “downward wage flexibility”. However, there was no “magic bullet” for bringing back growth, she said. No “deus ex machina”, says finance minister Speaking at the same conference, the Minister of Finance, Haris Georgiades, said that there will be no deus ex machina for the Cyprus economy. His reference to the ancient Greek dramas , in which the gods would descend at the end of the play to sort out the mess, came in response to remarks by European Commission official Verwey, who said that the Cyprus financial crisis “reminds me of the story of Icarus.” The Cyprus economy was “flying on wings of wax and feathers” before the crisis, he said. Georgiades said that there was “so much wisdom in Greek mythology and so little have we the Greeks learned from it”. But, he added, now Cyprus has an action plan that includes much of what should have been done a long time ago. “It is up to us to complement [the plan] with initiatives and polices that will encourage entrepreneurship and investment. “We have a plan. Let’s stay focused. And let’s do the job”. Mary Curran

Source: Financial Mirror

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