Cypriot Finance Minister Haris Georgiades said the country has “exited the danger zone” after the euro area endorsed a fresh disbursement of emergency aid and Bank of Cyprus Pcl emerged from resolution.
“I am very optimistic that, little by little, the situation is stabilizing,” Georgiades said in an interview today in Vilnius, Lithuania, where he took part in a meeting of his euro-area counterparts. “The government will press on.”
Euro finance chiefs earlier today approved a 1.5 billion- euro ($2 billion) payout to Cyprus, the region’s second transfer under the Cypriot 10 billion-euro rescue program. The country has battled to keep its aid plan on track since winning the lifeline in March in return for pursuing a tighter budget and forcing losses on uninsured depositors in the two largest Cypriot banks. Bank of Cyprus, which emerged from resolution in late July, had to absorb the second-biggest lender, Cyprus Popular Bank Pcl.
The Cypriot economy, the third-smallest in the 17-nation euro region last year, will shrink a cumulative 13 percent in 2013 and 2014, the country’s international creditors said on July 31. The International Monetary Fund is also contributing to the country’s rescue.
The Mediterranean island has already received an initial tranche of 3 billion euros from the European Stability Mechanism, the euro area’s permanent rescue fund. The ESM’s next installment of 1.5 billion euros is due by the end of September, the euro-area finance ministers said today after giving their approval.
“The Cypriot authorities have taken decisive steps to stabilize the financial sector” and “meet the fiscal targets,” the ministers said in a joint statement. “Because the short-run economic outlook remains difficult and subject to considerable uncertainty, continued full and timely policy implementation remains essential.”
This month’s ESM disbursement will be used to recapitalize Cypriot cooperative banks, according to Georgiades.
“Despite all the difficulties we have in front of us, the program is proceeding normally,” he said. “We are making progress.”
The ESM is due to provide 9 billion euros to Cyprus over three years under the Mediterranean island’s aid program. A third ESM tranche is due around the end of the year.
Georgiades said Bank of Cyprus, whose shareholders elected a new board three days ago, now needs to work out a restructuring plan. He said this would occur in the coming weeks.
The Cypriot government will continue to dismantle capital controls imposed in a bid to avert a run on banks after the agreement to impose losses on uninsured depositors, Georgiades said.
“Already these restrictions are significantly relaxed compared to what they were back in spring,” he told reporters. “We shall continue along this path of a gradual, but steady, relaxation until we do away with them completely.”
The total elimination of Cypriot capital controls will take months rather than years, Georgiades said.
“We are not talking years, definitely,” he said.