Cyprus Currency Move Annoys Business Leaders

by Lorys Charalambous, Tax-News.com, Cyprus

15 August 2001

The Cyprus Central Bank has shocked local businesses by cutting interest rates to 6.5% (a long overdue step towards Euro-zone interest rates) and widening the fluctuation band to 15% against the euro - something a bank usually does only in the face of serious monetary instability.

The Central Bank announced the decision on Friday, citing a worrying surge in the number of people borrowing in euros, which it said threatened to destabilise the banking sector. The Central Bank decision was aimed at deterring people away from borrowing in foreign currencies, while offering cheaper loans at home in Cyprus pounds. But leading business figures yesterday accused the island's banks of holding customers hostage.

Michalakis Zivanaris, president of the Employers and Industrialists Federation, quoted in the Cyprus Mail, said the move had come as a surprise: "I don't see why the two things have been connected," he said.

Zivanaris said the decision sent a discouraging message to businessmen and would make it very difficult for anyone to borrow in euros.

"The problem in this country is that we encourage people to do something, then we corner them and hold them hostage in situations they didn't even choose to be in, but which others have chosen for them," he said.

Panos Ioannides, chairman of the Union of Cypriot industrialists, said the aim of the decision was obviously to stop people taking out loans in euros.

"So what happens with those who have already borrowed in euros and let's put businessmen aside?" Ioannides said. "Let's talk about the people who borrowed for housing reasons with loans that have to be paid back in 15 years. How much is their house going to cost?"

Under pressure from EU negotiators, Cyprus partially liberalised interest rates at the beginning of this year after a long period during which they and the Cyprus pound had been held artificially far above their economically appropriate levels. The pound has fallen towards its likely entry level to the euro-zone but has further to go: thus Cypriots have used their freedom to borrow in foreign currency to avoid the pound, and to take advantage of lower interest rates against the euro, and the Central Bank is responding accordingly.

Around 80 per cent of all new commercial credit extended in Cyprus since borrowing rules were lifted in January has been in foreign currency. External borrowing showed a growth rate of 16-17 per cent, far outweighing the Central Bank target of 10 per cent and leaving local banks with a surplus of Cyprus pounds (weren't they expecting it?). The Central Bank was so concerned over the situation that it issued an announcement last month warning that there was no guarantee the fixed exchange rate of the Cyprus pound against the euro would continue indefinitely.

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