CENTRAL BANK (CB) Governor Athanasios Orphanides took the gloves off yesterday, criticising Finance Minister Charilaos Stavrakis’ handling of the country’s finances and the “continuing attempt being made by certain circles to dispute the legal framework which governs our [banking] supervisory system”.
Orphanides said that by failing to follow his previous advice, the government had missed an opportunity to tap into cheap European liquidity which would have seen lending rates in Cyprus “more than 1.0 per cent lower” than currently.
In a thinly-veiled reference to the row over Marfin Popular Bank’s (MPB) proposed transfer of its headquarters to Greece, he also said that the continuing public discussion about possibly amending the supervisory framework, “which can give the impression that it is taking place in order to serve particular interests”, is “fatally wounding the reputation and credibility of Cyprus as a financial centre”.
Speaking at yesterday’s regular meeting of the Economic Advisory Committee (EAC), Orphanides said that the global crisis had led the European Central Bank (ECB) to “a drastic readjustment of its monetary policy” by slashing its base interest rate and offering “unlimited liquidity with a 12-month tenor against acceptable security”.
Despite this fact, he said, “Cyprus is one of the few eurozone countries in which substantial measures were not taken to promote the possibility of drawing on increased liquidity from the eurosystem”, specifically enabling Cypriot banks to access cheap liquidity.
He said: “One such measure, which I suggested in previous EAC meetings and which could have helped in this direction, was for the government to issue special three-year bonds”, which the banks could have used as security for cheap ECB liquidity by first of all pledging some of their own assets to the government as security for the bonds.
Orphanides said that lending rates in Cyprus would have been at least 1.0 per cent lower than current levels if the government had followed his suggestion at the time. He said that a basic element in his calculation was the fact that if the banks had had the three-year bonds last month, they could have shared in the €442 billion 12-month money released by the ECB at the historically low rate of 1.0 per cent interest.
The Finance Ministry chose instead to issue €1 billion in four-year foreign bonds paying 3.75 per cent interest, passing the proceeds into the Cypriot banking system early last month. Orphanides said that the government has two further opportunities – in September and December – to draw on cheap ECB liquidity on a secured basis.
The Finance Ministry’s adoption last September of a new policy of making and withdrawing deposits with/from financial institutions directly – something previously done by the CB on behalf of the government – also came under fire from Orphanides.
He said that “in the absence of other compensatory measures”, the “significant reduction in the banks’ liquidity” due to occur at the end of the year when the government withdraws €1.7 billion in deposits, which had been warned against by the Association of Cyprus Banks (ACB), will possibly result in the banks “not satisfying the least liquidity indicator”.
He added that this problem could also have been avoided through “the timely issuing of special three-year bonds”, and said that in his opinion it would be “generally fair” if the Finance Ministry stops carrying out its own transactions directly with the banks and reverts to the previous policy of acting through the CB.
Speaking to the press after the EAC meeting, Stavrakis said that it had been made very clear to the banks that the government’s deposits would be withdrawn at the end of the year, and that in the “serious likelihood that they will be renewed” in early 2010, the banks would have to agree to conditions ensuring that the benefit of the low cost of these funds should be passed on to borrowers in the form of lower lending rates.
He added that the Finance Ministry’s technocrats had reached a different assessment regarding the three-year bonds, saying that “the technocrats feel that there are more negative than positive points, and that the methods being used at the moment are more effective, have reinforced the system more and have led deposit interest rates onto a downward course.”
Stavrakis told reporters: “There is no relaxation of vigilance in any way. I think you have seen that my hair has gone grey in the 18 months I have been Finance Minister – there is daily anxiety and questioning as to how we can maintain the Cypriot economy’s good results.”
Orphanides’ criticism of Stavrakis’ handling of the country’s finances came hard on the heels of the latest development in the MPB row.
The news broke on Thursday night of a letter Orphanides sent to Stavrakis, in which he turned down an invitation in blunt terms to attend a meeting yesterday at the Finance Ministry with MPB Executive Vice-President Andreas Vgenopoulos, on the grounds that he considered “unethical the one-sided consideration of the demands of one particular supervised entity”.
In the letter – copies of which were also sent to President Demetris Christofias, House President Marios Garoyian and House Institutions Committee chairman Rikkos Erotokritou – Orphanides also said that “the haste with which you seem to be proceeding to a possible examination of the institutional framework creates the impression that this is being done in order to satisfy a particular supervisee”, another reference to Vgenopoulos.
On 13 July, the House Institutions Committee had agreed that Stavrakis would oversee a “consensual dialogue” between the CB and the banks as to how the supervisory framework might be improved.
Orphanides had said at the time that “any dialogue in the future has to include all banks”, in line with the CB’s statutory framework.
Following Stavrakis’ invitation on Monday, the ACB had also decided that it would not attend yesterday’s proposed meeting, as only its Director General had been invited, rather than all banks wishing to attend. Instead, the ACB has suggested the dialogue should begin in September, involving an extended list of invitees.
