By Stelios Orphanides
Finance minister Harris Georgiades said Cyprus, the fourth euro area member to seek an international bailout, will not abandon its economic reform and consolidation programme agreed with creditors, even if it achieves sustainable market access before mid-2016.
“It is perfectly achievable to re-establish sustainable market access, even sooner and possibly significantly sooner than the expected period of mid-2016 that we essentially render the troika financing not needed,” Georgiades said in a Business Mail interview yesterday. “It should in no way signal a premature end to the reform and consolidation effort. Until the last day of the administration we shall be working hard essentially to create a new economic model for Cyprus”.
In the meantime, Georgiades said, Cyprus may once again test international markets by issuing new debt of an unspecified amount or maturity. In June, when Cyprus for the very first time went to international markets after it lost access in May 2011, the government issued 750 million euros in new debt at a 4.75 per cent average yield. A month earlier, it borrowed 100 million euros at an interest rate of 6.5 per cent via private placement.
“The timing, the amount and the cost are not pre-determined,” said Georgiades who heads the finance ministry since early April 2013, a week after Cyprus agreed the terms of a 10 billion euros bailout with the European Commission, the European Central Bank and the International Monetary Fund, also known as the troika. “The key parameters of an act of borrowing will be determined at the time depending on market conditions”.
The finance minister said Cyprus aims at continuing to improve its debt profile by replacing expensive, shorter term “domestically held debt with new borrowing from international markets of longer maturity and of cheaper cost” even as there “there is no pressing or dire need”.
In the first three quarters of the year, the Cypriot central government saw its interest payment fall 18 per cent to 393.5 million euros compared to a year before. In January to September, Cyprus generated a fiscal surplus of 219.1 million euros compared to an 83.5 million euros deficit in the respective period last year.
Georgiades said the reform process will continue even after the government lost its thin majority in the 56-seat parliament, when junior coalition partner DIKO withdrew from the government in February. The agenda will include an overhaul of the healthcare system, of the public administration, the continuation of the welfare system reform and privatisations, he added.
“I don’t agree that the reform process has slowed down and can provide evidence for this,” Georgiades, who served as lawmaker for pro-business DISY, today’s ruling party, from 2011 until his appointment in the government. “During the last few months alone we have seen such reform which I do not thing we have ever since in the Republic of Cyprus during its history”.
In September, the parliament passed an unpopular legislation framework on foreclosures together with six other laws that watered down its effectiveness. President Nicos Anastasiades vetoed two laws and referred four others to the Supreme Court. The parliament amended the vetoed laws and the Supreme Court ruled two weeks ago that the referred laws were unconstitutional. After the ruling, international creditors unfroze funds earmarked for Cyprus after they initially suspended its financing in response.
The new legislation aims at helping Cypriot banks which saw their non performing loans rising to around half of their portfolio, fight strategic default by speeding up foreclosure procedures which could otherwise take ten years or more. Several parties, including communist party AKEL and centre-right DIKO, said they will seek to pass a law in order to prevent the foreclosure legislation from coming into force before July next year.
While Georgiades warned opposition parties on November 11, to avoid disrupting the island’s bailout programme by passing legislation that was incompatible with the terms, he said yesterday that while the reform process is “in full swing” he sees no signs of “reform fatigue”.
“I will only agree to references to reform fatigue in that form, if only they are expressed as warning against reform fatigue,” he said and added that “while there is no hesitation on behalf of the government, we need allies, we need everyone to be onboard and we definitely need the parliament to continue as it has been so far to support the support and the consolidation process of the economy”.
In October, the IMF warned Cyprus that “resistance to consolidation and reform fatigue could compromise debt sustainability”.
As an example of the progress of Cyprus’s economic reform programme he named the overhauling of the Cypriot banking sector which was “near collapse,” Georgiades said.
Under the terms of Cyprus’s March 2013 bailout, depositors at Bank of Cyprus saw around half of their deposits in excess of 100,000 euros turned into equity, depositors at Cyprus Popular Bank, also known as Laiki, lost all their uninsured deposits while the two lenders merged.
“During the past few months we have in fact laid the foundations of a completely changed banking sector,” he said and added that this includes “new regulatory framework, stricter supervision on the basis of new legislation, a complete change regarding the structuring and the operation and supervision of the cooperative sector”.
On November 4, ECB’s single supervisory mechanism assumed responsibility for all four Cypriot systemic lenders, Bank of Cyprus, Cooperative Central Bank, Hellenic Bank and Russian Commercial Bank, also known as RCB, after they passed the ECB’s asset quality review in late October. Bank of Cyprus went ahead with a 1 billion euros capital increase in August and the Cooperative Central Bank received 1.5 billion euros in fresh capital from the state. Hellenic Bank, which was attested a 105 million euros capital shortfall at the stress test, is in the process of increasing its capital by 220 million euros.
“That describes a radical reform regarding the banking sector,” said Georgiades.
The finance minister said while he is “not much of a believer” in grand scale, multibillion investments “preannounced with fanfare noise,” the government’s “reform for growth strategy which goes above and beyond,” Cyprus’s reform programme agreed with international creditors, aims at creating “an even friendlier economic environment for business and investment”.
Undersecretary to the president Constantinos Petrides, also appointed by the president as commissioner for the reform of the civil service, is drafting a master plan aiming at facilitating investment and encouraging business. The government plans are expected to be unveiled later this month.