Nicosia, 29/04/2013 (Agence Europe) - Several weeks after agreement was reached on the Cypriot bailout, which provides for raids on savings in the country's two biggest banks, things are starting to fall into place. The Cypriot government is determined to make progress and is planning a new economic model for the island. Irena Georgiades, bureau director at the Cypriot Finance Ministry, discussed the future with this newsletter on Friday 26 April. (EL/transl.fl)
Agence Europe (AE): How are things going now, one month after the aid plan was decided upon?
Irena Georgiades (IG): We are going through an unprecedented economic crisis. We don't want to enter the blame game, but look to the future. We have a severe and savage recession to deal with, unemployment will rise, there will be serious austerity and the banking sector has already suffered a huge shock, but we are optimistic because we believe we also have a lot of economic promise.
AE: When will the restrictions on the movement of capital be fully removed?
IG: It will be necessary to restrict movements of capital until confidence returns. The restrictions have already been eased. It's true that the economy can't operate normally with these restrictions. After the two laws of Thursday 25 April that removed all the restrictions on commercial transactions, both within and outside the country, we will be able to return to normal very soon. If the banks react the way we expect, then the measures will be lifted very soon indeed.
AE: How do you explain the difference between the initial aid figure of €17.5 billion and the updated figure of €23 billion?
IG: The initial November figure of €17.5 billion was the sum of two amounts: €10 billion for the banks and €7.3 billion for government spending for 2013-2015. The programme was changed in April and now covers 2013-2016. Initially, €5 billion would have covered refinancing of loans and €2.5 billion for meeting spending deficits. The deficits now stand at €5 billion, because the recession will be more severe. For the banks, the €10 billion foreseen in November was calculated based on a core tier 1 assets ratio of 6%. The April figures are based on a 9% ratio. In November, it was a question of recapitalising the banks, but now it is a question of restructuring them, for which more money is needed.
AE: Does the last government share some of the blame?
IG: I don't want to blame the last government. We made errors as a country. We were exiled from the money markets two years ago, but didn't act fast enough.
AE: How are the negotiations with Russia over restructuring the loan going?
IG: We are on track. We should sign just before the Memorandum of Understanding is signed with the Cypriot parliament. (For Tuesday's vote, we do not anticipate that there will be a problem.)
AE: Wouldn't it have been better for all the banks to have been affected by the bail-in?
IG: Yes, it's true. One can say a lot of things with hindsight.
AE: By how much will unprotected savings be raided at the Bank of Cyprus (BoC)?
IG: For Bank of Cyprus, the initial estimate was 37.5% (Ed.: on unprotected savings of over €100,000). Some 22.5% will be frozen and the remaining 40% released. The final bail-in percentage will be known on the day the assessment is made by Pimco. We have an initial figure that will be finalised in the next three months. With guarantees from the central bank, the government hopes the situation at BoC will be back to normal by the end of this week.
AE: Will bank accounts be unlocked by then?
IG: Yes.
AE: What will be the bail-in percentage for bank restructuring?
IG: It will be 37.5% plus a little extra to be on the safe side. The extra margin will probably be under 22.5%. We have provisional figures but will not have any better estimate until the end of the week and the final figure before the end of the summer.
AE: Why was the debt at Laiki and Bank of Cyprus allowed to go up?
IG: This is a question we are ourselves asking. Their debt should never have gone up to such levels. The investigation will look at this too.
AE: Could Laiki have been saved?
IG: Laiki's problems are such that I do not think the cash withdrawals in the UK or anywhere else would have been problematic. With hindsight, perhaps Laiki could have been saved.
AE: What has happened to Laiki staff now that the country's second-biggest bank has been dismantled?
IG: It has been transferred to BoC. The idea is to save as many jobs as possible, but we understand that that will not be possible.
AE: Why did you raid the accounts of charities and private schools?
IG: We calculated a small haircut on this type of bank account so that the other savers would not be unfairly penalised. We are trying to reduce the impact of that particular haircut.
AE: How can an economy pick itself up without help from the banks?
IG: The banks are still there and we want them to return to normal as soon as possible so that they can start granting loans again. We hope that we will have a healthier and better regulated banking sector. From the start, the plan was to reduce the banking sector to bring it into line with the EU average. That was done overnight rather than gradually, but the banking sector is still there and we are working hard to restore confidence. The service sector is still there, we have always had a good tax system, a promising energy sector and the sun still shines. We are also looking into other sectors to invest in and will have concrete announcements to make very soon.
AE: How can small businesses that have suffered from the bank restructuring be helped?
IG: The government is looking at various incentives to encourage commerce. Businesses and individuals will face problems but we are doing everything we can within the aid programme.
AE: Can we talk of a transition to a new economic model?
IG: Our economic model wasn't viable. We cannot afford to make the same mistakes again. We are will continue to use our banking sector as a facilitator for development but at the same time, we have other sectors, like energy.
AE: Will the island need further aid?
IG: We are determined to implement everything we have agreed on. We do not expect to have need for any further aid.