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Recession and Unemployment Worse Than 1974 - Orphanides


The recession and unemployment have put the economy into a state of emergency that could be worse than after the 1974 invasion, said former central bank governor Athanasios Orphanides.

Orphanides was testifying to the commission of inquiry into the island's economic and financial crash, and said that the explosion at Evangelos Florakis naval base threw the country into a recession and destroyed more than half the electricity supply.

When Cyprus was ruled out of the international borrowing markets due to ratings downgrades, Orphanides said he knew the situation would become extremely difficult, and asked the banks to strengthen their capital base in early 2009. In 2011, a supposed stability fund from the banks was actually diverted to the government instead, said Orphanides.

The ex-central banker said he sent several alarmed letters to former president Demetris Christofias, but never received any answers.

"I felt strongly that I had a responsibility to pressure (the government to slow down spending) but I did not succeed...It is the duty of the central bank to give advice on public sector finances," said Orphanides.

Even up to May 2012, there was a chance the island could have avoided entering the bailout mechanism, he said. When the ECB started buying sovereign bonds, this was an opportunity for Cyprus to get cheaper borrowing costs, but his letter to Jean-Claude Trichet and attempts to arrange a meeting were fruitless.

After Cyprus applied for a bail out, it took far too long for the deal to be made, said Orphanides. Cyprus applied at the same time as Spain, but it took elections and a new government under President Anastasiades to confirm a 10 billion-euro loan from the Troika, according to his testimony.

Even as early as March 2008, the new government made a bad impression on him, said Orphanides. During his first meeting with former finance minister Charilaos Stavrakis, he was asked not to make any statements against the government's policies, and to sell the island's gold so that the government's projects could be implemented. The new government immediately increased spending in 2008, starting with an Easter bonus, said Orphanides.

Subsequent government spending ended up reversing the efforts made to get into the Eurozone and destroying former president Tasos Papadopoulos' fiscal savings, he said.

The communist government, and president, deliberately demonised the banking system, and undermined it for political gain, said Orphanides.

Lapse in central bank supervision?

Orphanides agreed there is corruption in the banks, and said he had tried to make changes during his tenure.

"I tried to change the system of corporate governance. Not to the level I'd like. We tried to make improvements," said Orphanides.

Questioned about Bank of Cyprus' loss-making purchase of the Russian bank Uniastrum, Orphanides said he had questioned some aspects of the acquisition and was given satisfactory explanations by a bank representative. Russia's banking system was still developing and the market was seen as having a lot of potential, he said.

Orphanides defended the central bank from Alvarez & Marsal's report which said the CB's supervisory controls were loose or weak. The report showed complete ignorance of the EU's supervisory framework and was not objective, he said.

"I was not surprised, because the company's specialty is forensic analysis. I do not believe that this company has expertise to examine weaknesses in banking systems," said Orphanides.

Pimco inflated the amount needed by the financial system by changing its methodology, said Orphanides. In April 2012, the banking system needed two billion euros, and the government needed 7.8 billion. Then the communication/propaganda started:

"We ended up having our own supervisory authority saying the banks' needs were increasing. The first attack was an announcement that the banks need 10 billion. I called Shiarly (then finance minister) and I said 'what are you doing?' The IMF will consider the debt unsustainable," said Orphanides. 

The debt haircut on Cypriot depositors was decided before the elections, said the ex-central banker. 

In concluding, Orphanides said that the co-operative banking system was collateral damage. 

In earlier developments, yesterday, Christofias astonished the country after he deliberately refused to testify to the commission, an offence punishable by a fine of 5000 euros or one year in jail.

Source: (Greek)

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