Cypriot central bank chief rules out debt haircut

Last Updated: Tue, Jan 15, 2013 19:45 hrs

Cyprus' central bank chief has ruled out writing down the government's debt as part of an international bailout currently being negotiated, insisting any such move would undermine investor confidence in the country and the wider eurozone.

Panicos Demetriades said Tuesday that talk of a Cypriot debt writedown — or 'haircut' — similar to that made by Greece shouldn't even be taking place. In Greece's case, private sector investors were forced to take losses on their holdings of Greek government bonds, a step that the other 16 eurozone countries insisted would remain a one-off for fear of scaring away investors.

"Haircuts of any kind will not help," Demetriades said in an interview. "Discussions undermine the prospect of recovery and threaten the stability of the euro area, not just Cyprus."

Cyprus is asking for a bailout from its fellow eurozone states and the International Monetary Fund because its banks have taken on huge losses on bad Greek debt and loans. The Cypriot government cannot afford to rescue them on its own.

Demetriades said that Cypriot banks will need at worst "less than €10 billion ($13.33 billion)" in rescue money, less than some had forecast recently.

Debt inspectors are now working on a report to determine the exact amount that Cypriot banks will need to replenish their capital buffers. The sum will help determine how much in rescue loans the Cypriot government will get.

The problem is that if the banks require the full €10 billion — a figure more than half the country's €17.5 billion ($23.32 billion) gross domestic product — the government may be overwhelmed by the rescue loans it will have to pay back.

If the debt is deemed unsustainable, the country would have to take tougher measures to solve its financial problems, such as deeper cuts to salaries and more tax increases.

Demetriades said he "doesn't share those gloomy scenarios" because they are based on worst-case assumptions of a deepening recession in Europe and beyond that he says have little chance of happening.

"If the rest of the euro area is doing better, the chances of the adverse scenario materializing for Cyprus are less," adding that the country can rebound from crisis because of good growth prospects in such sectors as tourism, shipping and as a result of the recent discovery of significant natural gas deposits off its shores.

Demetriades said Cyprus would move ahead with privatizing state-owned companies if it's deemed necessary to make its debt viable, despite political resistance at home, because it's part of the terms the country agreed in a draft bailout accord with the European Commission, the European Central bank and the IMF.

He said Cyprus was more likely to sell the telecommunications company CyTA than the electricity or ports authorities due to "national security considerations" over the country's ethnic division that came about in 1974, when Turkey invaded after a coup by supporters of union with Greece.

Cyprus' bailout talks have been dogged by reports that Cyprus' banks are used by Russian oligarchs to launder money. Demetriades dismissed such reports as "greatly exaggerated" and "fueled by political considerations in other countries," a veiled reference to Germany, where politicians have raised objections to the bailout.

"Cyprus has done as much as other countries in the euro area to combat money laundering and we are very serious about enforcing the legislation," he said.

He added that Cyprus stands to gain from an agreement by eurozone countries to set up a mechanism which would recapitalize banks directly instead of through governments in order to not overwhelm public finances with new debt. The mechanism is expected to be up and running next year and Demetriades said a decision on whether it would apply retroactively to Cyprus will be coming "in the next few months."

Demetriades said the draft bailout deal doesn't foresee an increase to Cyprus' low corporate tax rate of 10 percent, which country has used as a major selling point to attract business. Hundreds of companies have taken advantage of the rate to set up shop in the country.

"I don't think it's helpful for the economy of Cyprus to be raising this issue because the 10 percent rate is one, but not the only one competitive advantage that a service economy like Cyprus needs to have in order to protect its public finances and economy in order to pay its loan from international creditors."

He also dismissed speculation that more, tougher austerity measures may be needed to clinch approval for the bailout from fellow Eurozone states.

"If we start messing around and adding more measures, there is a risk that the program becomes less consistent, there is a risk that the recovery won't happen as predicted," Demetriades said. "Although Cyprus is a small country, history teaches us that even small events can trigger large crises."

Demetriades acknowledged that Cypriot authorities may have been at fault for delaying bailout talks last year, but the country — which has enough cash on hand to pay public sector salaries until March — is ready to sign "yesterday."

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