I would like to
thank you all for your presence. I would like especially to thank the Permanent
Representative of Cyprus and his team for organizing this event, together with the
Cyprus Investment Promotion Agency and for offering this opportunity for me to
share a few thoughts on the Cyprus economy and for a dialogue between us.
Let me start by
saying that the problems of the Cypriot economy are essentially self-sustained.
We should be blaming no one but our selves. It is the indecisions and
hesitations and the false assumptions and the mistaken policies of the recent
years which lead the economy of
Cyprus into troubled waters. Let us not forget that Cyprus joined the EU and
soon after the Eurozone with flying colors. The difficulties which emerged soon
after could have been handled much more wisely. Regrettably they were not.
The problems are
twofold. They relate, on the one hand, to a rather inefficient and wasteful
public sector. Over the years public spending was rising more that the growth
of the economy. The public sector wage bill became proportionately the largest in
the EU. Critically, during last few years public spending kept rising even as
public revenues were, in fact, falling. Public debt was rising rapidly before
even a euro was used to recapitalize banks.
The banks
constitute the second problem. An oversized, ill managed and poorly supervised
banking sector. I hate to generalize and obviously not all banks were in the
same position. But fact remains: credit expansion over the last few years was
obviously unsustainable. Whilst the public sector was over-spending the private
sector was over-borrowing. Lending was offered not so much on the basis of well
thought business plans but simply on the basis of collateral. The banking
system was financing not so much real investment but, rather, consumption and a
property bubble. The banking system was also over-exposed to the Greek market.
Emphasizing once
again that our problems are largely self-sustained, it has to be mentioned that
some decisions at EU-level were not, to put it mildly, particularly helpful. I
am not referring here to the bail-in decision. I am referring to the decision
to impose a haircut on Greek sovereign debt without care or caution regarding
the impact on the banking system of another Eurozone member state. I should
remind you that sovereign bonds were considered by the ECB as zero-risk. I am
not criticizing the decision for the haircut of these sovereign bonds as such
but rather the fact that it was not realized that this would completely derail
the banking system of Cyprus and no precautions were taken. Of course, it has
to be said, Cyprus was present at the decision table and this reinforces my
position that we should not be blaming anyone than ourselves.
In such
circumstances, Cyprus lost access to the markets since springtime 2011. Two
more years were wasted, during which public finances were running on reserves
and the banking system was sinking by the day. The problems reached a dramatic
climax earlier this year, in March, just days after the Anastasiades government
took office. Cyprus was in fact faced with a clear and present danger of
economic collapse and possibly of exit from the Eurozone.
Despite the
initial political shock for the new government, an agreement with the Troika
was reached before the month was over and it included the application of the controversial
bail-in instrument on a massive scale. It is know that the Cypriot government
accepted the bail-in under duress. Admittedly, alternatives were not easy to
determine either. The bail-in was not without side-effects and repercussions,
which to a very large extent relate not to the concept as such but to the lack
of preparedness and absence of an adequate framework.
And it is for
this reason exactly that I would emphasize the need for an agreed framework at
EU level regarding all the aspects of the Banking Union, including the
resolution framework, in a way that will establish transparency, predictability
and a level-playing field.
The MoU agreed
between the Government of Cyprus and the EC, the ECB and the IMF determines a
detailed and ambitious program which aims to deal with the shortcomings which I
have identified. We have been able to claim ownership of this program and to
achieve two positive reviews so far.
Since the
critical days of March, progress in the financial sector has been remarkable. The
banking system is already recapitalized. This was achieved not only through the
bail-in but also through a bail-out, in one other case, and with private funds,
in others. Restructuring plans are at an advanced stage of implementation.
Supervision and oversight has been improved significantly. The banking system
of Cyprus is already much smaller than what it was a year ago and this is not
necessarily bad. So long as this is a better functioning and better regulated
banking system which will be able to serve the needs of the productive sectors
of the economy.
Admittedly
problems remain. The credit lines have been broken and this bears down on the
already strained private sector.
Reestablishing credit lines will take time and effort. This is closely
related to the equally important challenge of effectively managing
non-performing loans. The liquidity strain, following on from the initial
shock, has been eased. Normality is
returning but, without doubt, a full return of confidence will also take time
and effort.
Equally
determined have been our efforts regarding public finances. We have taken early
and decisive action in the direction of spending cuts. And let me say that it
is never easy for a government to cut spending. In fact raising spending has
been one of the long-established vote winners for any government across the EU
and not only. We are now obliged to do the opposite.
Some will identify
any policy of spending cuts with austerity. Let me point out that austerity
means spending less than what one receives. We are still in deficit. A deficit
which is smaller than what was originally assumed, but which is still a
deficit. So I would rather refer to fiscal consolidation which, in the case of
Cyprus, is actually advancing according to schedule.
At the same time,
taking control of public spending enables us to send a clear message regarding
taxes. We shall not be raising taxes
further. There have been a number of tax hikes in Cyprus during the last two
years, with questionable effectiveness. This goes to confirm that raising taxes
during a downturn is not a good idea. Maintaining tax stability on the other hand and
creating the prospects for long-term macroeconomic stability is much more important
and encouraging to growth prospects and eventually to public revenues.
Emphasis is now
shifting to much needed structural reform. Over the next 2-3 years we shall be
implementing a civil service reform, a welfare reform, a health care system
reform, a reform of our tax administration and our public finance management
systems and an ambitious privatization program which is creating some agitation
but which I consider important and necessary and is bound to attract foreign
investment.
It is through
these reforms that we shall be creating the foundations of a much more viable
economic model for Cyprus.
Already key
productive sectors of the economy are demonstrating stronger than expected
resilience. It has been business as usual for the tourist industry, despite the
negative publicity of the earlier months of the year and an even better season
is expected next year. Our business services industry also remains strong.
Likewise with our shipping industry.
New sectors of
economic activity are emerging. The energy sector is a strategically important
multi-billion prospect, including not only the exploration of offshore natural
gas finding but also renewable energy, especially solar energy. I should stress that this is an
over-and-above prospect and definitely not a substitute to the difficult but
necessary economic reform.
The gaming
industry will also be opened-up and will includes among others a casino resort
for which investor interest is already being registered.
Ladies and
gentlemen,
It is not my intention
to portray a rosy picture. The Cyprus economy is still in recession and unemployment
is at an all-time high of 17%. I am however confident that the problems can be
resolved and that the prospects for Cyprus remain positive. We acknowledge the
difficulties. But we have a plan and we are implementing it. And this is
something which is beginning to register with rating agencies.
I should also mention
that the policy of restoring the soundness of our economy is part of the wider
policy framework of our government. One which aims to position Cyprus firmly at
the core of the European Union, as a dedicated and reliable member. This is complemented with a foreign policy
reorientation which emphasizes relations with Israel and with all our neighbors
in the Eastern Mediterranean region. Which also emphasizes the scope for
further improving relations with the US. Which includes the forging of
relations with NATO. And which, above all, includes a renewed determination for
resolving the problem of the division of Cyprus and for normalizing relations
with Turkey.
I would like to
conclude here by expressing once again our stated ambition: to establish Cyprus
as an island of stability, prosperity and cooperation. For the benefit of its
people and to the service of our European family.
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