Cyprus on the Mend?

by Delia Velculescu, IMF Mission Chief for Cyprus
Speech at The Economist Conference
Nicosia, Cyprus
November 25, 2013

Much has already been accomplished in the relatively short time since the approval of the stability program for Cyprus. Let me give three examples.

• First, to address significant vulnerabilities that had built up in Cyprus’s large banking sector, the two largest and insolvent banks were resolved and merged. Following two independent asset reviews, the new Bank of Cyprus was fully recapitalized, accounting for recognition of current and future losses, and exited resolution at end-July.
• No taxpayer money was used in this process. This allowed for broader burden sharing of costs and prevented an otherwise unsustainable increase in public debt.
• More recently, the third largest commercial bank, Hellenic Bank, was also recapitalized, including with foreign participation, and without use of state support.
• Second, to unwind the deterioration in public finances that took place in the years preceding the crisis, the authorities approved upfront an ambitious fiscal adjustment of 7 percent of GDP for 2013-14. Measures underway, together with prudent budget execution, allowed them to maintain a primary budget surplus through end-September, despite a deep recession underway. As a result, fiscal targets under the program were comfortably met, and end-year targets remain well within reach.
• Third, to restore the sustainability of the pension system and strengthen the economy’s competitiveness, key structural reforms were implemented early on, including to the pension system and the COLA wage indexation mechanism. Some results can already be seen: a recent review of the pension system confirmed its long-run viability; and there are signs that the downward wage flexibility is helping to cushion jobs.

Through these actions, the authorities have demonstrated strong resolve to take very difficult but necessary decisions.

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