Capital controls imposed on the Cyprus banking sector should be lifted as soon as possible, provided the sector is stabilized, Association of Cyprus Banks Director General Michael Kammas has said.
"Capital controls should be lifted as soon as possible provided the system is stabilized first," Kammas said in an interview with CNA, noting that although controls have been eased they cannot remain in place.
"We are in the Eurozone and there cannot be two separate euros," he pointed out.
Restrictions on capital flows have been imposed following a €10 billion bailout agreed late March that featured bailing in uninsured deposits, that is, forcing deposits over 100,000 to pay the recapitalization of the island`s two largest banks.
Kammas said the Association had argued that no capital controls should apply on the island`s local transactions but disagreed with the view that capital controls should be limited to Bank of Cyprus, which is run by an administrator, as it has absorbed the assets and liabilities of the Cyprus Popular Bank, Cyprus` second largest lender which will be liquidated.
"We are still in shock because what was happened here was unprecedented. We bailed-in the island`s two systemic banks instead of bailing them out," he said.
Recalling that since the onset of the global financial crisis in 2008, the EU provided to Eurozone banks €4.5 trillion in the form of financial assistance granted to member-states, Kammas pointed out that in the case of Cyprus, whose banks have capital needs worth €10 billion, the Eurogroup decided to bail-in uninsured deposits.
Nevertheless, Kammas said that Cyprus has still prospects of recovery, noting that if Cyprus implements the provisions of a memorandum containing state expenditure rationalization, as well as structural reforms both in the public and the banking sector "we could achieve a second economic miracle."
"Despite the Eurogroup`s harsh decision, our public debt will be sustainable and there are prospects," he said, pointing out that Cyprus still has advantages such as the tax and supervisory framework, the services sector, a network of double taxation treaties, well-educated workforce and Cyprus` corporate tax rate which, although increased to 12.5% from the previous 10%, remains one of the lowest in the EU.
He welcomed the European Central Bank position to accept Cypriot bonds as collateral for granting liquidity to Cypriot banks.
Kammas was cautious over a decision by the Central Bank of Cyprus to impose penalties on commercial banks that pay interest rate over 3.5% in a bid to force them to lower their lending rates, noting the banks would love to lower their lending rates because this would facilitate investments.
"If the economic situation is not good and expectations are negative, reducing interest rates does not mean strong demand for lending," he pointed out.
Furthermore, Kammas said that Bank of Cyprus should exit the consolidation status as this would restore stability in Cyprus` financial system and the economy as a whole.
"Such a development would assist us to face the challenges that lie ahead," he said.
