Orphanides Says Cyprus Economy at Critical Juncture

Cyprus must not waver from the path of austerity if its economy is to emerge with a clean bill of health from the vicious cycle in which it is trapped, the outgoing head of its central bank said on Monday.
Athanasios Orphanides said the economy was at a critical juncture following a Greek debt writedown that has heavily impacted the island’s banks.
Orphanides, whose term expires on May 2, told parliament that fiscal measures taken by authorities were a step in the right direction, but said he was concerned about comments from officials that targets have been missed in the first quarter.
“The economy of our country is going through critical times. The right handling (of this) is required. At stake is not only the economy of Cyprus and the well-being of its citizens, but its national reputation and standing,” he said.
Cyprus, the eurozone’s third smallest economy, has been shut out of international capital markets for more than a year. High bond yields forced it to turn to its close ally Russia in late 2011 for a 2.5 billion euro loan, a sum that the government says will cover its ordinary financing needs this year.
But the state may be called in to help the island’s banks if their own efforts to recapitalize flounder by a mid-year deadline, calling to question where it may find extra cash if required.
Cyprus’s second largest lender, Popular Bank needs to raise more than 1 billion by June 30. It and Bank of Cyprus posted record 2011 losses on a writedown of Greek debt.
Orphanides, who also sits on the Governing Council of the European Central Bank, said the exclusion of the Cyprus from debt markets from May 2011 had increased domestic interest rates, harming growth and employment.
That yield surge, also linked to slippage and delays in taking corrective action, has put heavy pressure on the banking sector, “exposing (it)… to unprecedented risk, rendering it vulnerable to negative external developments.”
Orphanides, who has repeatedly expressed misgivings about the Greek debt writedown, ploughed the same furrow on Monday in one of his last public appearances.
“When European leaders decided on an impairment of Greek debt … (Cypriot) banks and the government got into this vicious cycle that we are in today.”
Orphanides will be succeeded at the island’s central bank by Panicos Demetriades, a financial economics professor from the University of Leicester in the UK.
(source: Reuters)