Panicos Demetriades, Governor of the Central Bank of Cyprus, said he is cautiously optimistic about the future of the Cypriot economy and the future of the euro area.
He also stressed that the conclusion and implementation of an economic adjustment programme that will be agreed between Cyprus and the Troika of lenders – the European Commission, the European Central Bank and the International Monetary Fund – should be regarded as a catalyst that will reinforce macroeconomic and financial stability.
“The conclusion and implementation of an EFSF/ESM economic adjustment programme should not be seen as a development hampering investment opportunities. Potential investors have nothing to fear in that regard,” Demetriades said.
Speaking at the Cyprus International Business Association forum, “Cyprus as an international business centre post EFSF”, Demetriades said that central bank’s aim is to bring the talks with troika to a successful conclusion by the end of October and that the reforms to consolidate public finances and strengthen competitiveness are to be negotiated and agreed between the government, the troika and other stakeholders.
Referring to the island’s favourable tax regime, he said that negotiations with the troika on the conclusion of an EFSF/ESM economic adjustment programme will not have any impact on the tax for international business activities in Cyprus.
Demetriades said that the two largest Cypriot banks have requested state aid partly due to the capital shortfalls emanating directly from the Greek PSI.
He pointed out that the banks were able to absorb a significant portion of these losses because, prior to the Greek PSI, they had substantial capital buffers. These, however, were not sufficient to absorb all the losses. In addition, the quality of both banks’ assets has been affected by their substantial exposure to Greece, and the deterioration of the property market in Cyprus, he said.
He noted that both banks continue to be profitable from their operations and their latest results show a more determined effort to clean up their balance sheets through a sharp increase in provisions, and to contain their operating expenses.
As regards the government’s application for financial support from the EFSF/ESM and the IMF, Demetriades said that this application primarily aims to recapitalise the banking system. “Recapitalisation is of course an opportunity to also restructure the banking system, and I can assure you that this opportunity will not be missed”, he said.
“I am confident that the Cypriot banking system will emerge substantially stronger from the current crisis and, as a result, so will the economy”, he added.
“A smaller, leaner and more competitive banking system will naturally have room for large and small players, and for different types of ownership, i.e. domestic, foreign, shareholder-based or mutual. Such diversity in any system is a source of resilience”, he said.
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