* Bank of Cyprus reform “urgent”; Gold sale not only option
The Troika inspectors from the international lenders that have pledged to provide a 10 bln euro rescue package are back in Cyprus this week to review the work done so far on public sector reforms, cutbacks and resizing the banking sector to a level corresponding to GDP.
However, despite some optimistic comments by Finance Minister Haris Georgiades and various other government officials, the main thorn in the discussions, prior to releasing the second tranche of the bailout loan in September, will be the slow exit from resolution status of the Bank of Cyprus, the island’s main lender that was forced to merge with troubled Popular Laiki.
Bank of Cyprus has an interim CEO at the helm and a technocrat chairman, who, together with the short-term board of directors, are trying to implement a major restructuring that includes slashing the workforce from over 5,700 to nearly half within a year, shrinking the branch network and offloading local and overseas assets, such as real estate and subsidiaries, including Uniastrum bank in Russia.
The bank’s revised accounts should be concluded by the end of July, when the first of the redundancy plans will be implemented, while a meeting of shareholders could take place by late-August or early September to review the bank’s restructuring plan and decide whether CEO Christos Sorotos will stay on in order to see through all the changes.
The Troika inspectors’ assessment is the first since they started scrutinising all aspects of the Cyprus economy more than a year ago, in particular the public and banking sectors in order to see if they were sustainable under stressed scenarios.
Government officials have said that most of the conditions laid down in the Memorandum of Understanding have been or are being implemented since last December, while fiscal targets are “on a good path”.
But a demand that profitable state utilities such as the telco Cyta, electricity producer EAC and the Ports Authority be opartly or fully privatised, have fallen on deaf ears.
FIRST MEETING
The first Troika meetings will be held Wednesday morning with the Minoster of Finance and Central Bank Governor Panicos Demetriades.
The three representatives of the main lenders, Maarten Vervei (European Commission), Delia Velculescu (IMF) and Isabelle von Kopen (ECB), are leading a 20-strong team that will also meet with technocrats from all government departments, as well as the National Council on the Economy headed by Nobel prize winner Christoforos Pissarides.
First indications suggest that the government’s optimism is justified. The public sector deficit has been reduced by 0.5% of GDP with fiscal measures including a 67% increase in non-tax revenues of about 480 mln euros, due mainly to licensing fees from the oil and gas exploration companies. Each license is estimated to have fetched about 50 mln euros.
Public sector spending has also been reduced by just over 8%, while the public sector wagebill is expected to shrink by about 11% this year and the next.
Finance Minister Georgiades said that the sale of gold reserves, estimated at about 400 mln euros, was not the only option under consideration to pay down its debt and that other alternatives were being considered, without elaborating what those alternatives were.
News that Cyprus could be forced to offload gold triggered a steep fall in the price of the precious metal in April as traders worried about the precedent it could set, but not the real impact on the gold market.
President Nicos Anastasiades said last week he hoped there would never be a need for the island to sell its gold reserves and the issue was not being discussed by the government as it was a responsibility of the central bank.
FAITHFULL IMPLEMENTATTION OF MOU
Georgiades said the quickest way to shed the harsh terms of the 23 bln euro bailout was for it to faithfully implement the reforms demanded.
Regarding the two-week assessment by the Troika inspectors, similar to other countries that have received bailouts, such as Greece and Portugal, Georgiades said the focus will be on quickly restoring the banking sector back to health in order to get the economy moving again.
A speedy exit from restructuring will allow Cyprus to take new steps that will further ease and ultimately eliminate capital controls, he told reporters.
Deputy government spokesman Victoras Papadopoulos said "the government for some time now has been stressing the need to consolidate the Bank of Cyprus and lift the restrictive measures, and to this end is pressing in every direction, however it is not the government that is responsible for this, but the Resolution Authority."
He added that President Anastasiades believed that the restrictive measures cause more competitiveness problems to our economy.
Meanwhile, the opposition Citizens’ Alliance, headed by presidential hopeful Yiorgos Lillikas, has said that both Bank of Cyprus and Laiki have already collected some 12.5 bln euros from large despositors as part of the bail-in plan, some 5 bln more than what was decided by the Eurogroup in late March, while the 37.5% threshold on depositors’ haircut will be maintained and increased to 50%.
Earlier reports had suggested that the Troika reforms included a 15% cut to the state payroll by 2013, a 10% cut in benefits, and the abolition of public sector wage indexation, also known as the Cost of Living Allowance (CoLA). All this, including the 1 percentage hike in VAT earlier this year to 18%, will help to achieve fiscal consolidation.
