Eurogroup President Jeroen Dijsselbloem has dismissed worries that Cyprus like Greece will need additional help from its international lenders, noting that the two cases are not similar and that he expects that Cyprus will recover in the short-term.
Dijsselbloem, who was addressing a student lecture at the University of Cyprus, further said that had the Eurogroup decision on a bail-in of March 2013 for Cyprus been taken a year earlier things could have been different.
Referring to the Cyprus related unprecedented Eurogroup decision in March 2013 for a ‘hair-cut’ of unsecured deposits of over 100,000 in Cyprus two largest lenders he said that at the time there was no other option.
“That was a very drastic decision, I am very much aware of that and I realize that it was a shock not just for the financial sector but to the whole society of Cyprus and it has led to losses of course in terms of economic growth, employment, short – term negative effects”, he said.
He further added that “the principle of bail-in is the right approach as a matter of economic principle in my mind because I feel that those people who put their money in banks and have profited in the good years should also carry losses in the bad years”. The principle, he noted, should be applied on the basis of clear rules, known to everyone.
Replying to a question as to whether he thinks mistakes were made in Brussels last March, Dijsselbloem said that “I don’t think that it is fair to go back only a year to the Eurogoup decision but it is fair to go back even further and to see where the problems arose, the problems which created massive risks for Cyprus and the Cypriot economy”.
The problems, he added, “did not arise at the time of the Eurozone decision, there was a reason why the Eurozone had to be involved at all with the problems of Cyprus”. He spoke of the enormous growth of the financial sector in Cyprus, noting that it was not built on a sound basis.
He said that one needs to go back to the point where the real problems arose. Having said that, he said, “could the decision have been different? Could the design of the programme have been different? Yes”. But then, he added “there should have been an agreement maybe a year before, so not one year ago but two years ago”.
He expressed the point of view that a lot of time was spent postponing decisions. “By the time it was 20th of March last year, we had run out time”, he noted. Referring to other alternatives he said that there could have been no EU involvement and the banks could have gone bust with tremendous effects on the economy.
Referring to the possibility of a larger loan to Cyprus he said that it would have lumbered Cyprus for generations and the sustainability of the debt was taken into consideration.
“I would never call something which caused so much pain a success, but do I defend it? Yes”, he pointed out.
If the Cypriot government and Europe would have acted sooner he noted it would have been a different decision.
The Eurogroup’s President further expressed his admiration for the work that has been done so far. He dismissed the argument that Cyprus will need further support from its international lenders, just like Greece did. He said the two cases are not alike and he expressed the point of view that Cyprus will recover in the short term.
He reiterated his view that Cyprus is a flexible, strong economy, which possesses highly trained people, adding that all the fundamentals for a strong recovery are here.
Replying to another question about concerns that Cypriot banks might fail the asset quality review by the European Central Bank due to their holding of Cypriot sovereign debt he said that his information is that this is not the case, as approximately 94% of this debt is being held until its maturity.
Replying to a question over non-performing loans (NPLs) he said it is major issue in all of Europe. Banks, adding that banks should treat this problem in a sensible way restructuring them, taking some of the losses, whilst at the same time strengthening their balance sheets.
Asked about the creation of bad banks, he said the matter should be looked into by the Ministry of Finance and the Central Bank of Cyprus. Creating a bad bank is also very costly, he warned, giving the example of such a bad bank created recently in the Netherlands. He also pointed out that there are buffers in the adjustment programme if they should be needed.
Asked over the imposition of 12.5% of corporate tax which hinders the service sector in Cyprus, he said the effort was to strike a fair balance and to share the burden out between the government, the banks and the other sectors of the economy. He further expressed the point of view that 12.5% is still a very low corporate tax compared to the rest of Europe.
Replying to a question over the granting of Emergency Liquidity Assistance (ELA) to Cypriot banks for far too long, he voiced the opinion that “we should have acted sooner”. He defended the European Central Bank and said that it is the national Central Bank which decides to grant ELA. He did however point out that he did not wish to cast blame neither to further discuss the matter noting that the existence of such emergency funding is a necessity.
The discussion was coordinated by UCY Dean of Faculty of Economics and Management Haridimos Tsoukas.
In a short address, UCY Rector Constantinos Christofides, thanked Dijsselbloem for his lecture, noting that it gave students the opportunity to enhance their understanding of the European Union.
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