The president of Cyprus has backed down from his over-optimistic view of the economy just eight months away from the next elections and said he would not exclude a bailout to recapitalise the Popular Bank hobbled by exposure to Greek debt, but said it would be "chaotic" if the neighbouring country left the euro zone.
President Demetris Christofias said the prospect of the island entering a financial support mechanism wasn't a foregone conclusion, but one that could not be totally ruled out and blamed everything on the Cyprus banks' exposure to Greek sovereign debt and the "incompetence" of the former central bank governor to regulate the banks better.
He also said "it would not be the end of the world" if Cyprus missed its stated target of a 2.5% deficit this year, and eventually hit 3.0%. However, Christofias reiterated his argument that the "western capitalist" system had failed and refused to discuss further austerity, without saying how his administration would fund growth.
Cypriot banks have been hit heavily by exposure to debt-crippled Greece. Thesecond-largest lender, Cyprus Popular Bank, faces the prospect of nationalisation if it does not find new investors by a mid-June deadline through its 1.8 billion euro rights issue.
"I don't take as a given that we will negotiate entry to a support mechanism, (but) I don't want to absolutely exclude it," Christofias told a news conference when asked if Cyprus, the euro zone's third smallest economy, could need external help.
Cyprus Popular Bank needs 1.8 billion euros to meet a core tier 1 capital – an indicator of financial strength – of 9%, before June 30.
The figure is equivalent to about 10% of Cyprus GDP, and an amount the island can ill afford as it runs deficits and is shut out of international financial markets.
Economists and some officials on the island have been warning for months that it might be the latest euro zone member to need support due to problems with banking and the costs of an explosion that knocked out its main power plant last year.
That bill will likely rise if Greece leaves the euro zone given the massive exposure of Cypriot banks to Greece. The exposure is in the region of 23 billion euros, compared to the size of the Cypriot economy of around 17.3 billion euros.
Christofias said technocrats were asked to look at contingency planning to "deal with a chaotic situation" if Greece does leave the euro zone. "It is something I hope will never happen," he said.
PLAN B
Government officials say external bilateral lending – Cyprus acquired a 2.5 billion euro loan from Russia last year – is among the options.
Christofias declined to disclose who the island was talking to on a bilateral loan, and implied that any help from EU partners, a separate option, would focus on the banking sector itself.
"There are support mechanisms and support mechanisms. There is a support mechanism for banks, which does not imply what happened to Greece," he said, referring to stringent austerity measures imposed on the country.
"We are fighting so we do not need a support mechanism for banks," he said.
Cyprus has been downgraded to junk by two of the three ratings agencies, primarily due to Greek exposure and also because of fiscal slippage. The island is trying to curb its deficit from 5.3% of GDP in 2011 to below 3.0%; the finance ministry has set a target of 2.5% this year.
"We did say 2.5%, but if 3.0% is reached they (the European Commission) will probably say 'bravo'," Christofias said.
Cyprus's economic problems were exclusively due to exposure to Greek debt, he said, and regulatory oversights of the Central Bank, under the then stewardship of former governor Athanasios Orphanides.
Orphanides, who has rejected any blame, has said that problems could have been averted had Cyprus negotiated better terms for the Greek debt writedown agreed by European leaders in October 2011. He told parliament on April 30 that he was rarely consulted by Christofias.
Christofias, who apppointed a replacement in May, was scathing in his criticism of Orphanides. "No governor of a central bank can impose his will on the executive, elected by the people," he said in his usual critical tone of anyone who dares doubt the president.
"My experience (with Orphanides) was traumatic," he said.
