The decisive implementation of the terms of the Memorandum of Understanding agreed between the Cypriot authorities and the Troika (European Commission, European Central Bank and International Monetary Fund) on a €10 billion bailout is a one way street, if Cyprus were to return to a sustainable growth path with sound public finances, Central Bank of Cyprus Governor Panicos Demetriades has said.
Excluded from international markets since April 2011, Cyprus applied for financial assistance from the EU bailout mechanism on June 2012, after its two largest banks sought state aid following massive write downs of Greek bond holdings amounting to €4.5 billion. In March Cyprus and the Eurogroup agreed on a €10 billion bailout, on the condition that Cyprus would secure 10.6 billion required for the recapatlisation of its banking sector from own resources.
Under the agreement, Cyprus Popular Bank, Cyprus` second largest lender will be wound down, whereas its good part will be absorbed by Bank of Cyprus, the island`s largest lender, whose unsecured deposits (above €100,000) may take losses up to 60%. Furthermore, Cyprus has undertaken to implement fiscal consolidation measures amounting to 7.1% of GDP, until 2016.
"The fact that the Cypriot economy today is under the protection of the EU and the IMF means that the devastating scenarios, such as the failure of the systemically important banks and the disorderly default of the state, which would lead to immeasurable negative impact have been averted," Demetriades told a conference for the presentation of the CBC` annual report, adding that in case of a default by the systemically important banks the state would not have sufficient capital to protect the insured deposits (below €100,000).
Demetriades also underscored "the fact that the banking system recapitalisation does not burden future generations with an unbearable public debt will help avert austerity measures in the years ahead."
The CBC Governor defended the provision of emergency liquidity to the banks through the ECB`s Emergency Liquidity Assistance, noting that without that liquidity "the two large banks would have been led to a disorderly default and liquidation, activating immediately the Deposit Protection Fund, whose capital was not sufficient.”
This, he explained, would have resulted in an obligation to repay the insured deposits, something which would have led the state itself to a disorderly bankruptcy with devastating consequences for our country.
Amid the adverse financial conditions both in Greece and Cyprus, Cyprus` two largest banks resorted to ECB emergency liquidity amounting to €11.2 billion (9,2 billion for CPB and €2 billion for Bank of Cyprus). This debt has been transferred to the consolidated Bank of Cyprus.
ELA has played and continues to play a stabilizing role, allowing the smooth function of our banking system during the negotiations for the Cypriot memorandum, Demetriades concluded.
