Eurogroup President Jeroen Dijsselbloem 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 on Monday night, said that had the Eurogroup decision for a bail-in of March 2013 for Cyprus been taken a year earlier things could have been different, adding that at the time there was no other option.
“That was a very drastic decision, I am very much aware of that and I realise 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 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, “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 added 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.
If the Cypriot government and Europe had acted sooner he noted it would have been a different decision.
The Eurogroup President 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.
As regards non-performing loans (NPLs) he said it is major issue in all of Europe, 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 hike to 12.5% of the corporate tax which hinders the services sector, he said the effort was to strike a fair balance and to share the burden between the government, the banks and the other sectors. He added that 12.5% is still a very low corporate tax compared to the rest of Europe.
HARSH BUT INEVITABLE
The decision for the bail-in was very harsh but it was also inevitable, given the specific situation in the banking sector, Dijsselbloem said earlier in the day after his meeting with Finance Minister Harris Georgiades.
“As you know we considered different options but this option that came out was, in the given circumstances, unfortunately inevitable,” he said, adding that during the past year the EU has worked very hard on the banking union to make sure that this kind of situation will not arise in the future.
He added that the economy of Cyprus has shown to be dynamic and flexible, and therefore he was optimistic that Cyprus will recover within a short period of time.
Dijsselbloem said that the essential condition that has to be fulfilled, he explained, “is the economic stabilisation and bringing back the trust in the financial sector”.
“I don’t think that there needs to be further steps from the Eurogroup or the Eurozone. I think that the programme is being very effective and has really all the instruments as well as the financial means to support Cyprus so the programme is well designed and will be very effective,” he added.
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