Central Bank Governor Panicos Demetriades has stressed that a Memorandum of Understanding, the basis of an international bail-out for Cyprus, must be implemented in full.
Demetriades was addressing on Monday the Parliamentary Committee on Financial and Budgetary Affairs during the presentation of the 2014 budget.
He assured MPs that the Central Bank’s primary objective is the full restoration of the financial sector’s credibility and stability so that the real economy can recover.
He noted that the implementation in full of the MoU is a strong basis in order to gradually reverse adverse developments of recent years as a result of the euro zone debt crisis, the great exposure of Cyprus’ banking system to the Greek economy and the deterioration of the country’s fiscal situation.
Demetriades said that he believes the effort undertaken so far is remarkable and pledged the Central Bank’s determination to continue on track.
He referred to the recapitalization of the banking sector, including the island’s biggest lender, the Bank of Cyprus, which was taken out of resolution on July 30 and the restructuring process of cooperative institutions which is underway.
“As a result of recapitalization, the banking sector is expected to possess by the end of 2013 notable capital which may be used to absorb further possible shocks in 2013 and possibly in 2014”, he pointed out.
Demetriades said he also expects that due to a downturn in macroeconomic conditions the banking sector is forecast to take further losses due to increased projections, an increase in non-performing loans, a rise in unemployment, a fall in household income, a deterioration in sales and a reduction of business profits.
However, he highlighted the fact that it is projected that expected losses will be adequately covered and the banking sector will stabilize and be gradually restored.
The Central Bank Governor stressed the necessity for a “determined implementation of the memorandum”.
He said government efforts as regards public finances are “in the right direction”.
He particularly referred to the fiscal deficit for the period of January – August 2013, which was recorded at 1.6% of GDP compared to 3% at the same period of the previous year and initial projections of 2.7%.
Speaking on macroeconomic developments in general, Demetriades said that it is expected that the GDP will shrink less than the original projection of 8.7%.
However, he noted, the effects on both the economy and citizens are unprecedented, making specific reference to a continuous and significant unemployment hike particularly in young people.
Referring to short-term projections on economic activity for 2014, as they are presented in the budget, he said that they reflect the measures taken so far in accordance with the MoU.
At the same time he warned that there is a significant degree of uncertainty as regards both the ongoing period and coming months.
“Despite the fact that it should be noted that important steps in the right direction and towards a normalization of the situation are taken, there are still dangers and we should all be careful and ready to face worse than expected results”, he said.
Demetriades stressed that a full consolidation and restructuring of the banking sector and restoration of investor trust are prerequisites for a return to sustainable growth and reduction of unemployment.
To that extent he noted that the consensus and understanding of all involved play an important role in restoring investor confidence and the country’s credibility to its creditors and its partners.
He spoke of the importance of institutions and in particular of the Central Bank’s independence and expressed his readiness to cooperate with any administration for the benefit of the country.
Excluded from international capital markets since April 2011, Cyprus applied for financial assistance from the EU bailout mechanism, as its two largest banks, Bank of Cyprus (BoCY) and Cyprus Popular Bank (also called Laiki) requested state support following mass losses as a result of the Greek sovereign debt haircut.
The aid package from the Troika featured a sizeable reduction of the island`s banking sector, as well as bail-in of uninsured deposits.
Under the package agreed in March, Cyprus wound down Laiki, whereas deposits over 100,000 euro held at the island’s biggest lender, Bank of Cyprus, lost 47.5% of their value, after being converted into bank shares.
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