CBC Governor: Cyprus to request “up to €10 billion” for banking recapitalization
The financial assistance programme that has been agreed between the Cypriot authorities and the Troika (EU Commission, ECB and IMF) may reach up to €10 billion for the recapitalisation of the banking sector, Central Bank of Cyprus Governor Panicos Demetriades has said.
“Nobody knows for sure. A figure has been placed in the memorandum. The number will be up to €10 billion,” he said in a press briefing on Friday.
He recalled that the exact size of the recapitalisation of the banking sector will be clarified on December 7 when Pimco, the firm that carries out a due diligence audit to the loan portfolios of the Cypriot banking sector, will announce its preliminary results.
The adjustment programme agreed with the Troika last week in the context of Cyprus’ application for financial assistance is estimated to reach €17.5 billion. Finance Minister Vassos Shiarly has said 6 billion will be used for the refinancing needs of the public sector and €1.5 billion to plug the fiscal shortfalls for the period between 2012 – 2016.
Asked whether the Cypriot debt will be sustainable, Demetriades said “there’s no magic number,” adding that what should be examined is whether the debt is reducing or increasing in the long-term, taking into account the interest rate and the economy’s growth rate.
He however expressed the belief that the measures included in the memorandum are based on “realistic assumptions” and they secure debt sustainability.
Demetriades also affirmed that the Memorandum will include the establishment of an Asset Management Company by late January 2013 that will assume the troubled assets in a bid to clear the books of the banking sector from bad assets.
“In such circumstances it very difficult not to create an AMC and the Central Bank sees that in a positive way,” he added.
Bankers made big mistakes ————————— Furthermore, Demetriades was critical of the decisions taken by the administrations of the island’s two major banks namely the expansion to Greece and the exposure to the Greek sovereign debt.
Following the haircut of the Greek debt Cyprus Popular Bank and Bank of Cyprus impaired losses estimated at 40% of Cyprus’ GDP which lead the two banks to request state support to cover their capital requirements.
“A lot of mistakes have been made in the baking sector,” he said.
Demetriades also denied the position that the Greek bonds were considered as zero risk, pointing out risk is determined by the markets and that “there was huge risk.”
“It is very difficult for one to understand how one or two banks could assume such large risk. The basic issue is why they had such large concentration in one product. When someone puts 120% of his capital in one product its more than clear that the concentration was excessive,” he said.
He also criticized the way with which the Cypriot banks expanded abroad.
“The way with which the banks expanded abroad was completely irrational and has not assisted core business,” he went on to say.
Recalling that the CBC has appointed Alvarez and Marsal to probe into the circumstances which lead the two banks to request state support, Demetriades pointed out that mistakes made in the past should be analysed so that they will not be repeated in the future.
“I don’t believe that covering up facts serves any purpose. On the contrary, a minor problem if not dealt with promptly may be exacerbated. We want to address the problems in their real dimensions and solve them at their roots,” he said.
The CBC Governor said we are entering a period which cannot be considered pleasant, pointing out that the Central Bank believes that the remedies include consolidation, restructuring and recapitalisation.
“This is necessary to restore investor confidence and to place the economy in a course of sustainable growth, he said, adding that the process that has been agreed with the Troika provides for “a restructuring process at the end of which the banking sector will be smaller, stronger and more resilient.”
