THE ECONOMY is not likely to come out of recession anytime before 2014, but the coming sacrifices resulting from an EU bailout will ultimately benefit the island, Central Bank governor Panicos Demetriades said last night.
He warned of painful measures such as negative effects on people’s income and also spoke of the importance of being realistic given what the economy is facing.
“With the aid of the financial support mechanism, and through the consolidation of the banking system and of public finances, I believe we will see light at the end of the tunnel,” the Central Bank chief said yesterday in an exclusive televised interview with the state broadcaster CyBC.
“We do not expect the economy to come out of recession in 2013. But the foundations will be laid so that we can create a healthy economy for the medium-term,” Demetriades said.
He went on to acknowledge that people’s income would be negatively impacted as a result of necessary cutbacks.
“Some of the measures will undoubtedly be painful, but we can look at this as an investment for the future,” he said, adding: “It’s important to be realistic.”
Cyprus, with a runaway deficit, requested financial aid from the EU on June 25; since then, officials from the International Monetary Fund, the European Commission and the European Central Bank - known as the ‘troika’ - have twice visited the island.
The troika has stressed the need for the government to slash the expensive state payroll -- proportionately the highest in the eurozone – and introduce structural reforms.
Demetriades said a memorandum laying out the terms of the loan would be signed with the troika most likely by the end of next month.
The loan interest would be “quite low”, but on the flipside the repayment period would be relatively short although Cyprus expects to be granted a certain grace period, Demetriades said.
The top banker forecast that new capital would eventually start flowing to the island’s banks - starved for cash and in heavy need of recapitalisation.
This was key, he said, because economic recovery would come about from the private sector and its access to liquidity – rather than from the state pumping money into the economy.
Ever since the application for EU assistance was filed in June, the government has been at pains to blame the banks for the development, while Demetriades has announced there would be a thorough investigation into their loan portfolios and investments.
Meanwhile an investigation into whether banks may have misled investors into buying high-yield securities should be completed by late September, he said.
Investors say depositors were given advice by untrained staff giving them the impression they would have a stable, safe income from investing their savings into high risk securities. When the Bank of Cyprus (BoC) and Popular Bank stopped paying interest and blocked off access to investors’ capital, a number of incensed people complained.
Demetriades pledged that if the banks would be subject to “sanctions” if found to have misled investors, but he did not elaborate.