President of the Republic of Cyprus Demetris Christofias has sent a letter to President of the European Commission Jose Manuel Barroso, in which he asks for his support for a direct bank recapitalisation tool to function retroactively for those countries that have received indirect recapitalisations for their banking sectors.
In his letter, dated 11 of January 2013, President Christofias notes that the common objective should be not only to reduce the risk of contagion of sovereigns from a banking crisis in the future but also to address the prevailing crisis itself.
It is for this reason, he adds, “that we strongly believe that the direct bank recapitalisation tool should be retroactive for those countries that have received indirect recapitalisations for their banking sectors”.
According to President Christofias this should be subject to the applicable ESM rules.
As he points out, “by not allowing the retroactive application of the direct bank recapitalisation tool, we will limit the positive impact of all the steps that have been taken until now by the European Bodies to address the prevailing crisis.”
He adds that if no action is taken towards this direction, the aim to break the vicious circle between sovereigns and banks would be jeopardised.
Referring to the negotiations which are going on for the conclusion of the Cyprus MoU with Troika, he notes that the preliminary results of the independent due diligence exercise of the Cyprus banking sector, calculated by PIMCO, point out to a capital shortfall under the adverse macroeconomic scenario which might, under certain circumstances, have significant adverse effects on Cyprus’s debt sustainability.
In his letter to President Barroso, the Cypriot President notes that this may cause significant problems and delay the conclusion of the political agreement, a situation which is very detrimental for Cyprus’s economy, adding that already the persistent uncertainty and the problems faced by the banking sector have seriously affected economic activity in a very negative manner.
In this respect, he adds, Cypriot banks in distress should be recapitalised through the financial assistance programme on the basis of the capital shortfall derived under the baseline macroeconomic scenario included in the draft MoU, which is in line with the European Commission`s projections.
In addition, President Christotias stresses that an Enhanced Credit Line for the additional amount derived under the adverse stress scenario could be provided for Cyprus. He adds that such a decision would eliminate all current concerns on public debt sustainability and open the way for the conclusion of a political decision at the Eurogroup level for the provision of financial assistance to Cyprus, thus, enhancing confidence to the Cyprus banking sector and dispersing the prevailing uncertainty.
Moreover, he notes that once the establishment and activation of the direct bank recapitalisation tool is in place, Cyprus intends to request the replacement of a significant part of the financial assistance that will be given to Cyprus for its banking sector under the MoU by the new tool.
President Christofias points out that Cyprus is currently facing difficult times mostly due to its banking sector’s exposure to the Greek economy.
Cyprus banks, he stresses, “regardless of their wisdom to invest heavily in Greek Government Bonds, have been a victim of the above decision by suffering a huge amount of loss reaching approximately 25% of Cyprus’s GDP which now the Cypriot taxpayer is called upon to cover”.
Concluding, he expresses confidence that President Barroso will be rendering his full support to Cyprus’ case in the context of European solidarity.
