ECONOMY

Cyprus central bank head says ready to act if Greece spills over

FRANKFURT/NICOSIA – Cyprus is ready to react to any spillover from the crisis in Greece, the governor of the island’s central bank said on Tuesday, adding the two countries were decoupling in the eyes of international markets.

Chrystalla Georghadji’s written remarks, sent on Tuesday in response to questions from Reuters, underline concerns among Cypriot policymakers amid heightened uncertainty over Greece’s future in the euro zone.

She sought to distance Cyprus from Greece, saying that the close links between the countries’ financial sectors had weakened considerably.

“Cyprus is no longer at high risk from financial developments and uncertainty in Greece,” Georghadji said.

“The path of Cypriot bond yields is diverging from the corresponding path of Greek bonds, reflecting the decoupling of the two economies in international markets.”

Greek five-year government bond yields are trading around 15 per cent, reflecting the risk premium of the investment, while the nearest Cypriot equivalent, a bond maturing in 2020, yields less than 3.5 percent.

She cautioned, however, about the psychological impact of problems in Greece. “We remain vigilant and ready to react to any adverse spillover,” she said.

Cyprus’s financial sector was effectively ring-fenced from Greece in early 2013 when the island’s banks were forced to sell off their Greek branches in order to protect Athens from turmoil in Cyprus around the time of the island’s international bailout.

Now, with the Cypriot economy recovering and Greece sinking deeper into financial trouble, the situation has reversed.

Georghadji’s remarks echo those of politicians on the island, who want to reverse a perception that the two countries are inextricably linked, worried that Cyprus could be dragged down with Greece should Athens’ finances collapse, forcing it out of the euro.

[Reuters]