Cyprus central bank war flares up… again!

* Disy, ICPAC, Governor, Stavrakis at loggerheads

Opposition deputy leader Averof Neophytou has reignited a three year debate about the independence of the Governor of the Central Bank of Cyprus and his supervisory role over banks in Cyprus.
The ongoing debate flared up last year in what some might argue as the government’s efforts to undermine the Governor’s authority, with the conflict predating to attempts to sell off the island’s gold reserves in order to shore up public sector debt.
Governor Athanassios Orphanides has also taken the brunt of continued criticism from the ruling communist Akel party and most recently from President Demetris Christofias, over his comments and projections of the not-so-rosy situation of the Cyprus economy.
The arguments may continue over the next few days as the island prepares to go to the polls on May 22 and all sides try to win over public opinion, either by criticising or defending the government’s economic policy.
In an announcement issued Tuesday, Democratic Rally vice president Neophytou challenged the Minister of Finance, Charilaos Stavrakis, to disclose the merits based on which the government appointed Marios Klitou, chief executive of a leading audit and accountancy firm, to the six-member Central Bank council, a demand he says has remain unanswered for over a year.
Neophytou questioned a case of conflict of interest for Klitou and criticised the government’s complacency to accept a letter from the Institute of Certified and Public Accountants of Cyprus as proof that there is no conflict.
In comments to the Financial Mirror, Marios Klitou called this a “vendetta” and asked why other council members were not targeted, considering that one of them, Nicos Constantinou, is also a practicing accountant, while another, Lefteris Hadjizacharias of KPMG, handled banking clients and on several occasions inquired about one of these banks.
“I have never questioned the authority of the Governor nor his regulatory role over banks. I have never even handled banking clients as this is clearly defined by the code of practice of my international network, Baker Tilly,” Klitou said.
Disy’s Neophytou said that it was inappropriate for the ICPAC to investigate the professional activities of an accountant that may affect the independence of the Central Bank council, and repeated calls of the past that a legal opinion be given only by the Law Service of the Republic of the Attorney General himself.
“What relation does the ICPAC have to questions we put to the Minister of Finance?” Neophytou insisted, adding that “it is not the responsibility of the ICPAC to judge if the professional activities of an accountant could affect the independence of the Central Bank council.”
“Does this mean that the government adopts the view that professional bodies can replace the state infrastructure? And in this case, the Attorney General and the Law Service?
Bank watchers, however, have said in private comments to the Financial Mirror that such public arguments could put in doubt the credibility of the Central Bank’s supervisory role.
“This should not have happened,” said a leading banker. “What the (Finance) Minister should have done was to resolve the matter and not stoke the opposition. It’s bad enough that the reputation of the Cyprus banking sector is hanging from a thread, we don’t need more doubts hanging over our heads.”
The ongoing conflict between the Governor and the government started just before and after the Christofias administration came to office in 2008 and over whether the Central Bank should sell the government’s gold reserves. This was followed by the decision to transfer the management of the public debt from the central bank to the Ministry of Finance, while the realisation of profits from the exchange of Cyprus pound notes and coins to euros caused a further conflict.
By 2009, efforts were underway to determine the authority of the central bank Governor, which some say could have been related to attempts by other banks to secure a license from Cyprus that would give them wide freedom within the EU, while other banking regulation issues may also have provoked conflicts.
However, what irritated President Christofias most was the Governor resorting to press conferences to explain the risks behind any efforts that would undermine his authority and what impact this could have on the island’s banking system and its reputation.