The Cyprus economy suffered a debacle when the European Council decided in October 2011 to proceed with a haircut on Greek bonds, said Thursday former Minister of Finance, Vasos Shiarly.
Shiarly, who was testifying before the Investigation Committee, set up to look into the near collapse of the banking sector and the economy of Cyprus, said that neither the banks nor the government of Cyprus had realised the extent of the damage that Cyprus would suffer.
“The damage suffered by Cyprus due to the haircut on Greek bonds reached 4.5 billion euro, or 25% of its GDP” he said, adding that the damage suffered by other EU countries was between 1 to 2%.
As a result, he said, Cyprus “suffered a debacle due to the decision to proceed with a haircut on Greek bonds”.
Shiarly added that neither the banks, nor the government were aware of the extent of the damage that would follow, and “could not and did not take any measures to reduce the damage through negotiation.”
The former Minister was also asked if the haircut on bank deposits was first introduced in March 2013. He said the issue was never raised with him.
“This issue was never raised and we never accepted such a thing” he stressed.
“What was discussed”, he said, was a haircut on the banks’ securities, “an issue on which we raised objections”, he added.
Shiarly said that during an informal meeting he held with the Troika beginning of December 2012, some thoughts were expressed concerning a haircut on Cypriot bonds, just as was the case in Greece. He underlined though, that the head of the Troika delegation expressed the view that this would cause great destruction in Cyprus and that it was not wise to proceed with such an idea for just two to three billion euro, given that on the same day, the Troika was talking about providing Greece with 45bn euro.
Asked if he had any disagreements with former President of Cyprus Demetris Christofias as to how to address the financial problems faced by Cyprus at the time, Shiarly said “there were some disagreements” and added that his role was to reduce the budget deficit and meet the targets outlined in the MoU with the Troika.
Replying to questions, he pointed out that the Ministry of Finance was submitting proposals to the President and his Cabinet on how to better address the economic crisis.
He also said that the EU had repeatedly made recommendations to Cyprus to reduce its deficit below 3%. The President, Shiarly said, assured him that the government would take “painful measures” to reduce the deficit to 2.5% or 3% by the end of 2012.
Commenting on the decision to grant state aid of 1.8 billion euro to Laiki Bank, Shiarly said that if the government had not done so, the Bank would have closed on the 30th of June, 2012. He pointed out that after the closing down of Laiki Bank, the state would have 30 days to cover all secured deposits of up to 100,000 euro, which were between eight to ten billion euro, an amount, which the state could not cover and could not even borrow from any lenders.
In addition, he said that if the closing down of Laiki Bank had any effect on the Bank of Cyprus, then the state would have to cover secured bank deposits amounting to 13 billion euro. “That would mean Cyprus’ total destruction” he said.
Furthermore, he said that the International Monetary Fund was delaying the signing of the MoU between Cyprus and the Troika, which was finally agreed on the 22nd of November, 2012, by all sides.
On 19 December, 2012, he added, Cyprus had already fulfilled all MoU obligations and commitments abiding by the provisions of the MoU.
Shiarly will appear again before the Committee on the 17th of May.