NICOSIA: Any escalation in the Ukraine crisis poses a threat to Cyprus’s economy, the outgoing governor of the country’s central bank said in an interview, noting that he expects the bailed-out eurozone member to return to growth in 2015.
Panicos Demetriades, who participated in talks which saved Cyprus from bankruptcy a year ago, said lenders underestimated the resilience of the island’s economy, one of the smallest in the 17-member currency zone. He also said he anticipated capital controls could be fully lifted this year.
Cyprus is receiving €10bn in aid from a troika of lenders: the International Monetary Fund (IMF), the European Central Bank and the European Commission.
In March 2013 it was forced to wind down Laiki, Cyprus’s No. 2 lender, and convert a sizeable portion of large deposits into equity at market leader Bank of Cyprus. The “bail-in” occurred after IMF debt sustainability analysis determined the country could not afford debt exceeding 100 percent of its GDP. “In hindsight, data shows that they (the IMF) could have used a higher benchmark of debt to GDP which would have limited the bail-in,” said Demetriades, who steps down in early April. Had lenders used a benchmark of 120 percent, an additional €3.6bn could have been made available, restricting the bail-in of depositors to one bank instead of two.
It was the first time Demetriades had said he had disagreed with the IMF’s assumptions. He said the IMF was “challenged” on the matter, but “never moved from their position”.
“This would have limited the shock to confidence and would have made it easier for Cyprus to recover. Although, not withstanding the big shock, we are already showing early signs of recovery,” Demetriades said.
Cyprus’s economy contracted by 5.4 percent in 2013, significantly lower than initial lenders’ projections of an 8.7 percent drop in output. They forecast a further 4.8 percent dip in 2014 before returning to growth in 2015. Reuters
