* Papadopoulos: “We can survive a haircut” *
The Council of Ministers has prepared legislation to aid the banks that are heavily exposed to Greek government bonds in the event of a crisis and to create a financial stability fund.
A financial crisis management bill would allow the government to bolster a bank's liquidity if required, and a second bill would create a fund to help stabilise the banking system, spokesman Stefanos Stefanou said.
The banks' heavy exposure to Greek sovereign debt, estimated at some 4.2 bln euros and with a high risk of default, has been cited as a concern by credit ratings agencies which have downgraded the island's sovereign ratings in the past few months.
"Recent events, and events which are unfolding as we speak, have highlighted the need for swift action to safeguard financial stability," Stefanou said.
The draft legislation would require parliamentary approval.
"There is communication between the finance ministry and Central Bank on various scenarios related to the euro zone crisis and developments in the situation concerning Greece," Stefanou said.
STABILITY FUND
House Finance Committee chairman and Diko MP Nicholas Papadopoulos said that the Cyprus banking system can survive a haircut of preferably no more than 50% on Greek debt held by the three main banks.
Critical of the government’s delay to proceed with a stability fund, Papadopoulos said that “some of us had the initiative to establish a bank stability fund because for some time now we had foreseen and expected some problems in our banking system from the exposure to the Greek risk and we insisted that we should be ready … for a haircut of Greek debt.”
“Unfortunately, to date our recommendations remained unheard,” he said, adding that the bank stability fund was not yet established.
Central Bank and ECB Council member Governor Athanassios Orphanides had suggested nearly a year ago the establishment of a bank stability fund, modeled on a similar fund in place in Germany, but a conflict with other members of the bank’s council over regulatory issues overshadowed the initiative.
At the same time, the government avoided cuts in spending in order to reduce its budget deficit by trying to prop up revenues, partly by trying to grab nearly half of the yet-to-be-established bank stability fund, money for which would be raised from a fraction on bank earnings over three years.
HAIRCUT BELOW 50%
Opposition Disy vice president Averof Neophytou said that all parties and officials in government and the Central Bank of Cyprus should be on alert “to see how we can safeguard the Cyprus economy and our banking sector.”
He said that measures should be taken immediately to help raise the rating of the Cyprus economy, “because it is very difficult with the current ratings for the banks to be recapitalized with funds from the market.”
Ruling Akel party MP Pambos Papageorghiou said that “there is no danger to local deposits or loans.
“This is a matter that concerns the capital of the banks and not the general public,” he said, adding that the local banks had already made a provision in their recent accounts of a 20% reduction in profits from a potential haircut of Greek government bonds.
However, an analysis published in Kathimerini suggested that a haircut would result in reduced lending from banks, with repercussions on small to medium sized enterprises (SMEs) and growth, possible recall of some loans and pressures on borrowers, an unknown hit on the performance of insurance and pension funds and an unknown amount of losses by the Social Insurance Fund.
