President Slams Orphanides, Says His Decision Not To Reappoint is Correct

President Demetris Christofias threw verbal knives at outgoing Central Bank Governor Athanasios Orphanides today, saying that Orphanides had gone out 'shooting' and that his decision not to reappoint him was correct.

Speaking at a May 1st event organised by the trade union federation PEO, Christofias slammed Orphanides' speech criticising his government's overspending. Orphanides is trying to 'unload' his responsibilities for the banking sector's exposure to Greek bonds, said Christofias.

"Mr. Orphanides' responsibilities for the Cypriot banks' exposure to Greek bonds is overwhelming," said Christofias.

It is unimaginable that a Central Bank governor wanted to impose policy on the elected president of the republic, he said.

"What did Mr. Orphanides require? To breach workers' rights. The rights we're talking about today, repeal CoLA, cut wages and put a burden on the common man," said the communist president.

Asked whether Mr. Orphanides' report that the president had tried to interfere with his independence was true, Christofias said 'no political intervention has been done'.

Yesterday, Orphanides publicly analysed the causes of the current economic crisis, saying that Cyprus' deficit increased four times to 1.2 billion euros from 2008 to 2009 under Christofias' presidency, wiping out a surplus of half a billion euros inherited from the previous government. Overall, between 2007-2009, there was a fiscal gap of 1.6 billion euros, said Orphanides.

Unlike other EU countries, the rise in the deficit cannot be explained by a deep recession or by unemployment benefit payouts at the time. The problem came from a huge increase in government spending on social benefits, salaries and pensions that is estimated to be 1.3 billion euros between 2007 and 2009, said the economist. The deterioration in the deficit continued in 2010 and 2011 and government spending increased by a rate of 4 percent per year while GDP remained stagnant, he said.

As a consequence of this imbalance, public debt increased to 4.3 billion euros between 2008 and 2011, he said. This had serious implications for interest rates for Cyprus bonds in international markets.

Up until December 2010, Cyprus enjoyed low interest rates on external borrowing of up to 4-5%. From then on, however, lending rates rose, particularly since there were no measures taken by the government to counteract the defict.

"At this point, in the first few months of 2011, I tried to explain the need for an immediate reversal of this dangerous situation...Unfortunately, despite the clear risk, the necessary fiscal correction through immediate action did not happen," said Orphanides.

By May 2011, the state was excluded from international markets and long-term bond yields soared. As of June 2011, interest rates on Cyprus bonds reached the same level as those of Greece, Ireland and Portugal and today it is around 13%, he said. Cyprus' lack of access to affordable borrowing affects domestic growth and employment, and adds tremendous pressure to the banking sector due to increased financing costs, said Orphanides.

The banking sector reported losses in the billions of euros on its exposure to Greek debt, however, the government's position that Orphanides is to blame for private sector banks buying Greek bonds is shaky at best. Bonds are bought five, 10 and 20 years ahead, by 2011 when a Greek bond write down was being discussed, they were already classified as junk and would have been worth very little anyway if Cypriot banks had unloaded them at that time. However, the government has shown little understanding so far about finances and economy, and it has been up to the opposition to push through urgently needed austerity measures. Christofias has been against austerity measures, saying they would affect workers' rights, and continued foot dragging on serious cuts in government spending means that an entry into the EU's emergency funding mechanisms has still not been ruled out.

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