08 July 2013

WSJ: Cyprus Finance Minister calls for urgent completion of bank restructuring

Cypriot finance minister Harris Georgiades said that Cyprus's central bank must complete the process of radically restructuring the country's biggest lender, Bank of Cyprus PCL, by early August at the latest.

Capital controls in place on the island since March are hindering economic activity and should be lifted as soon as confidence in the financial sector recovers and more cash is in the system, he said. Bank of Cyprus has been stuck in legal limbo since March, when Cyprus sealed a rescue agreement, meaning that its activities have been suspended as experts assess what percentage of uninsured deposits—those of more than €100,000—need to be converted to equity in the bank.

The delay in reopening the bank has cast doubt on the futures not only of the lender, but of the country itself, because it has led to the extension of capital controls. No other eurozone country has imposed such controls since the common currency was launched in 2002.

A large chunk of uninsured deposits at Bank of Cyprus—accounts totalling more than €100,000—will be converted into equity, to boost the lender's capital base and let it write off bad loans. The procedure is known as a bail-in, in contrast with the bailouts other European banks received during the financial crisis.

Reopening Bank of Cyprus will help boost confidence in the banking sector and allow the authorities to slowly lift restrictions on the movement of capital, Mr Georgiades said. "We think capital controls are the biggest problem, even bigger than the bail-in as such", Mr Georgiades said. Uninsured depositors in both Bank of Cyprus and Cyprus Popular Bank have faced losses.

Tackling concerns that Cyprus is about to ask for a renegotiation of its bailout conditions, Mr Georgiades said his government has no intention of asking for a change in the terms of the rescue. On the contrary, he said, "We want to implement the programme". Still, he said that Cyprus and its creditors must discuss and resolve in a coordinated manner "practical issues that arise from the implementation of the programme".

Mr Georgiades said spending cuts his government has made don't amount to an austerity programme. "I won't call what we're doing austerity, it's fiscal consolidation", he said. "Austerity is to spend less than what you have and we're still spending more."  Fast and deep cuts in public spending in other eurozone countries have been blamed for prolonged recessions and surges in unemployment. Mr Georgiades said he is committed to big spending cuts even though Cyprus is in recession.

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