15 November 2013

Cyprus meets targets, economy not as bad as expected

“Cyprus’s programme is on track,” said a statement from the European Commission, European Central Bank and International Monetary Fund (IMF).

“All fiscal targets have been met with considerable margins, reflecting the ambitious fiscal consolidation underway, prudent budget execution and a less severe deterioration of economic activity than originally projected.”

The so-called troika began its second review of the island’s shell-shocked economy last month, and approval was needed for the country to receive the next tranche of a desperately needed 10 billion euro ($13.5 billion) bailout agreed in March.

It said “structural reforms are also advancing” and that, since the last review, “there has been significant progress toward the recapitalisation and restructuring of the financial sector. This has allowed further relaxation of payment restrictions since July, in line with the government’s milestone-based roadmap.”

In return for the bailout, Cyprus agreed to a raft of painful reforms, including a massive downsizing of its banking sector.

The island undertook to wind down its second-largest bank — Laiki — and impose losses of 47.5 percent on bigger deposits in its under-capitalised largest lender, Bank of Cyprus.

Looking to the economy, the troika’s statement said the “situation remains difficult, although the recession has been less pronounced than expected.”

Consequently, it forecast that gross domestic product would contract by about 7.7 per cent in 2013, or 1 percentage point less than originally envisaged.

“Tourism and professional services have proven relatively resilient, and confidence has continued to improve gradually. New foreign direct investment in the banking sector has been a positive sign,” the statement said.

However, given the “need to reduce high levels of private sector debt,” the troika now sees GDP contracting by 4.8 percent in 2014, compared with previous forecasts of only 3.9 percent.

It then sees a gradual recovery starting in 2015, while cautioning that the “risks remain substantial.”

Reacting to the statement, Finance Minister Haris Georgiades said the “readiness and good will of the government to apply and implement the programme has been reconfirmed.

“We remain within the defined framework as set out and the issue of needing additional measures was not raised,” he added.

Georgiades said the banking sector was now stable and adequately capitalised, while government finances were under control.

The review also focused on public sector reform and how far the government has moved on privatising the state-run telecoms and electricity utilities, issues the government has tip-toed around as it has focused on restructuring the banking system.

Georgiades said the troika had given the government a few more weeks to submit an action plan on privatisation.

The troika’s statement noted that now second lender Hellenic Bank has been successfully recapitalised with private funds, including foreign investment, and without state support.

At the same time Bank of Cyprus has a new board of directors and CEO and “has put in place a restructuring plan aimed at returning the bank to profitability over the medium term.”

“Funds for the recapitalisation of the cooperative credit sector have been secured in a special account and would not involve depositors,” the statement added.

“A board of directors for the Cooperative Central Bank has been appointed, and the restructuring of the sector is advancing, with four mergers of 28 institutions already completed.”

Cooperative banks have long been an important source of credit for small farms and businesses.

Source : By Agence France-Presse/

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