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Cyprus Central Bank Governor and ECB member Athanasios Orphanides said on Tuesday that the consequences of the global financial crisis in Cyprus are ''relatively limited'', noting however that significant deterioration in domestic economic activity cannot be overruled due to the ''too great'' global uncertainty.
Speaking in a discussion organised by Cyprus University of Technology (TEPAK) and Association of Social Reform (OPEK), Orphanides tabled two suggestions, which could avert further slowdown in the Cypriot economy.
The fist suggestion concerns the issuing of special three-year government bonds and their granting to private banks against collateral, which in turn could be used for pumping liquidity from European lending institutions.
He explained that these guarantees towards the government could include, apart from other bonds, current personal loans such as housing loans as well as current corporate loans.
Orphanides' second suggestion concerns the granting of corporate loans from the domestic credit system through risk sharing between the private credit establishment and the government.
''In our country the consequences of the crisis seem relatively limited and our banking system remains sound. The uncertainty however is too great and we cannot rule out a further significant deterioration in the domestic economic activity,'' he said, adding ''therefore, it would be wise to be prepared for any case.''
He also said that now ''it is widely acknowledged'' that the Cypriot economy was protected due to the Central Bank's strict supervision of the Cypriot banking system, which in the past ''was unjustly criticized as strict and conservative,'' but also due Cyprus accession to the Euro area in 2008.
Regarding the Euro area, Orphanides referred to the latest ECB forecasts, stating that ''contrary to past forecasts the Euro area is not expected to recover significantly in 2010.''
He said that this ''dramatic downward revision,'' both regarding declining growth rate and inflation in the Euro area in 2009 and 2010 was taken into account in the ECB's decision last Thursday to reduce its basic rates by 50 basis points to 1.5%, marking a 275 basis points reduction of the ECB basic rate since last December.
Orphanides added that the decision was accompanied by the further expansion of the ECB' non-standard measures such as the provision of unlimited liquidity against security up to six months on the ECB base rate, a measure which will be expanded beyond 2009.
Noting that the ECB's decisions contribute to the stability of the expectations on inflation and specifically on the ECB's Board decision to maintain inflation around 2%, Orphanides concluded that ''significant deviations under 2% for an extended period of time must be avoided so to avert a possible destabilization of inflationary tendencies.''
