Friday, August 23 14:51:59
A former senior ECB policymaker today said the euro zone's debt crisis was far from over, and that a messy bailout for Cyprus had taken the island backwards by at least a generation.
Athanasios Orphanides, who ran Cyprus's central bank from 2007 to 2012, also said a decision to haircut Greek bonds - excessively damaging for Cyprus - was "terribly wrong".
Cyprus shut down one bank and imposed heavy losses on a second in return for a 10 billion euro bailout from international lenders in March. Both banks had invested heavily in Greek bonds, whose value fell under a deal by European leaders in 2011 to ease that country's debt load.
"The euro zone is in an existential crisis," Orphanides told a judicial inquiry probing Cyprus's financial meltdown.
"Markets are currently calm, but I will not hide from you that I am deeply concerned that after the German elections in September we might have a flare-up of the crisis in the euro zone," said Orphanides, who now teaches macro-economics at the MIT in the United States.
Orphanides, who also sat on the board of the European Central Bank during his Cyprus tenure, said authorities could not legally prevent Cypriot banks from buying bonds in another sovereign since it was a member of the euro zone.
"This is something which still concerns me," Orphanides said. "Even today, such (sovereign) bonds are considered zero risk, for regulatory reasons. I think that is madness, but that is the reality of the regulatory framework," he said.
Cyprus's two major banks of the time, the now wound-down Laiki and Bank of Cyprus, lost about 4.5 billion euros on Greek bonds - a sum equal to 25 percent of the island's GDP.
When the banks turned to the state it was unable to help, since it had itself been locked out of financial markets for at least a year, forcing it in turn to apply to the IMF and the EU.
Orphanides, who was a sharp critic of the Communist administration in power from 2008 until it lost general elections in February 2013, said his repeated appeals to the government of the time to shore up public finances were ignored.
Banking sector problems were exaggerated by the former administration to detract from its own mistakes, along with a delay in negotiating aid, he said. (Reuters)