PARIS (MNI) – A direct recapitalization of Cyprus banks via
the European Stability Mechanism would keep the government’s debt at
sustainable levels, despite the country’s pending international
bailout, the governor of the Cyprus central bank said on Monday.
Replacing part of the bailout loans with direct capital injections
into Cyprus banks would “easily reduce the public debt to a level below
100% of GDP, alleviating if not removing altogether concerns about debt
sustainability,” Panicos Demetriades, governor of the Central Bank of
Cyprus, said in a speech in Nicosia.
Demetriades said there was “good reason why this should happen,”
notably that Cyprus should be treated equally to other Eurozone members
and that direct ESM recapitalization would enhance financial stability
not only in Cyprus, but also in Greece and throughout the Eurozone.
Cyprus banks suffered heavily in the Greek PSI debt swap, losing an
amount equivalent to 25% of the country’s GDP, Demetriades said. This
“solidarity” with EU efforts to help Greece should be recognized
in helping Cyprus stabilize its banks, he suggested.
Demetriades said that any public funds injected into Cyprus banks
could be paid back within three years by privatizing the banks.
Cyprus government debt amounted to 74.6% of GDP in the first
quarter of 2012, below the Eurozone average of 88.2%. Financial aid to
Cyprus could amount to another 60% of GDP, however.
German Chancellor Angela Merkel put the ESM’s ability to make
direct bank recapitalizations into question on Friday, telling
journalists in Brussels that debts that occurred in the past should
be the responsibility of national governments.
“If direct recapitalization is possible, it will come for the
future,” Merkel said.
–Paris newsroom, +33142715540; jduffy@marketnews.com
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