REACTION to the European Council’s latest decisions taken to save the European single currency, which will prevent Cyprus being dragged further into Europe’s debt crisis ranged from optimism to reservation. One thing European leaders failed to achieve was to create certainty, according to Cypriot economists.
Economist Spyros Episkopou, chief executive officer of Epicentral Consultancy Ltd, said he was hopeful the tightening of fiscal rules in Europe will eliminate the risk that Cyprus would again become fiscally complacent. “Introducing fiscal discipline to Cyprus is a positive development,” he said. Running the state in a frugal way “will no longer be an option but an obligation. The decisions will prescribe both procedures and monitoring”.
According to Episkopou, the decision to promote fiscal union can help strengthen the single currency bloc and dispel fears it could eventually fall apart as a result of one country’s fiscal troubles. “I am optimistic that the European leaders, even though they made mistakes in handling the crisis, will find the solutions.”
The majority of the European leaders agreed on Friday to introduce a 0.5 per cent fiscal deficit cap which a country can only exceed if its public debt is below 60 per cent of its economy, to lend the International Monetary Fund an additional €200 billion, and speed up the creation of the European Stability Mechanism to July next year.
In addition, they agreed to stick to the IMF’s practices with respect to imposing losses on holders of bonds of countries with a high debt burden. “To put it more bluntly, our first approach to private sector involvement, which had a very negative effect on the debt markets, is now over,” the President of the European Union, Herman Van Rompuy, told reporters on Friday.
Private sector involvement, which was championed by German chancellor Angela Merkel, was applied in the October 26 haircut of Greek bonds held by banks. The European Banking Authority said December 8 that Europe’s banks had to find €114.7 billion in fresh capital so that they could meet a 9 per cent core tier 1 capital ratio requirement. Cypriot banks had to raise €3.5 billion.
Rompuy’s assurances that the European Union will from now on apply IMF practices “are ironic for Cypriot banks”, economist Michalis Florentiades said. “They were caught up in the PSI. To tell you the truth, I cannot be sure whether they will never again go ahead with a restructuring of another country’s debt, even if they apply IMF standards”.
Central Bank governor Athanasios Orphanides said at conference in Stockholm, hours after van Rompuy’s comments, that if European leaders want to restore confidence in European bonds they should drop the provision for private sector involvement in their latest rescue package for Greece.
