Among the Cypriot banks, the Popular Bank is the most exposed to Greek sovereign debt and the subsequent write-down in its value. According to conservative estimates, it may need some €1.5 billion to recapitalise.
Bank stocks took heavy hits on the Cyprus Stock Exchange yesterday on news of the outcome of the elections in Greece. Popular Bank shares plummeted by 15.79 per cent, Bank of Cyprus’ dropped by 12.64 per cent, and Hellenic’s by 5.68 per cent.
Citing two Citigroup economists, Bloomberg reported yesterday that Greece now faces a 50 per cent to 75 per cent likelihood of leaving the euro in the next year to 18 months.
The omens in Greece were not good yesterday as political leaders there struggled to find the support needed to form a coalition government, calling into question the country’s ability to impose the measures needed to guarantee its future in the euro. The country is due to present details to creditors in June for a plan to save €11.6 billion in 2013 and 2014 as part of the second bailout deal.
Also of pressing concern are upcoming meetings of the Eurogroup and of Ecofin scheduled for May 14 and 15, where the new Greek government had been expected to present its positions on the memorandum signed with the IMF.
“The risk of Greece defaulting on its debt is now not so remote,” said economic analyst Dr Stelios Platis.
“As a precaution, I believe that Cyprus should as soon as possible start negotiating the terms for applying to a European financial support mechanism,” he told the Mail.
“Either way, we here need to enter a support mechanism so that we can draw assistance in the not-so remote event the situation in Greece deteriorates. I therefore strongly urge our own politicians to set aside their personal agendas and work to form a national unity government.
“Our banking sector will not survive should Greece leave the euro,” Platis went on warn, explaining: “That’s because all the exposure of Cypriot banks would be denominated in the new Greek currency, which would be immediately devalued, and as such would create immense regulatory capital requirements.”
In such a scenario, whereas the loans given out by Cypriot banks abroad have been in euros, in the event of a Greek default Cypriot banks would be paid back in the new Greek currency, for example the drachma.
“Yes, there is real possibility that Greece may leave the euro. And the EU is sure to turn the screws on Greece,” said University of Nicosia international relations expert Hubert Faustmann.
Meanwhile main opposition party DISY said it was monitoring developments in Greece “with anxiety,” as the potential exit of Greece – a key ally of Cyprus – from the euro would entail both political and economic consequences.
“We all realise the grave risks that lurk should [political] instability prevail in Greece,” the party said in a statement.
And European Party leader Demetris Syllouris called for an emergency meeting of all parties to discuss the economic crisis, warning that Cyprus must pre-emptively draw up its own “financial memorandum” before austerity measures are imposed from outside its borders.
Quizzed by journalists, former Central Bank governor Athanasios Orphanides said he hoped that a new government in Greece would “continue behaving responsibly, for the sake of Greece but also of the other EU countries.”
Anti-austerity parties in Greece, which won significant shares of the popular vote on Sunday, have been calling for a renegotiation and/or relaxation of the terms for financial assistance.
Orphanides said that in his opinion the memorandum signed between Greece and the IMF — governing the disbursements of financial assistance to the debt-ridden nation — could not be renegotiated.
New Central Bank Governor Panicos Demetriades, who officially assumed the post yesterday, said the regulator’s goal would be to re-establish as soon as possible the stability of the financial system through the recovery of investors’ confidence in the banking system.
”Failure is not an option”, he said adding that ”it would not only be a failure for us, but it would be a failure for the whole of Cyprus”.
By Elias Hazou
Published on May 8, 2012