The Cyprus banking sector will see more losses next year due to a further deterioration of the economy, but an adequate capitalisation this year will help absorb these losses and the sector will see a gradual recovery, the island’s centralbanker told a parliamentary hearing on Monday.
Central Bank Governor Panicos Demetriades said in a statement submitted to the House Finance Committee that banks will continue to suffer from higher provisions and a rise in non-performing loans, while the economy will be hampered by a rise in unemployment, a reduction in household spending, a contraction in sales and a drop in profits for businesses.
“The recapitalisation and the restructuring of the banking sector will contribute towards reinstating trust among investors, the complete abolition of capital controls and the return of the economy to a viable rate of growth, in accordance with the targets set by the memorandum of understanding,” with the Troika of international lenders.
Demetriades said in his statement that the banks’ dire situation is mostly due to higher provisions in the loan books and NPLs.
He added that after its racapitalisation from the bail-in of unsecured deposits, “Bank of Cyprus now has a strong capital base,” adding that the Cooperative institutions have also been boosted by a 1.5 bln euro recapitalisation from the MoU programme.
“The sector is expected to reduce operating costs, staff and branch numbers so that in the future it can become more productive and profitable,” Demetriades said.
He also told MPs the island state would see an economic contraction of less than the 8.7% forecast by international lenders this year, but that risks were on the downside for 2014.
In a clear reference to the ongoing dispute with President Nicos Anastasiades, who has accused the Governor of mismanaging the bailout and saddling Cypriot banks with billions in emergency liquidity assistance and wants to see him removed, Demetriades told deputies “it is important that the image our country projects on the functioning of institutions is a positive one,” implying the need for central bank independence to be respected.
An economics professor appointed by the island's previous communist government, Demetriades has repeatedly said he will not resign, even though acknowledging his relations with the government are dysfunctional.
A Reuters witness earlier saw him exchange a cold, cursory greeting with the Cypriot finance minister Haris Georgiades, sitting three seats away from him.
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