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Bank Of Cyprus Urges Action To Prevent Bailout

by Lorys Charalambous,, Cyprus

08 August 2011

Cyprus's largest commercial bank, the Bank of Cyprus, has called on the Cypriot government to make radical decisions to reduce the budget deficit and quash speculation that Cyprus will require an EU-funded bailout.

In a bold public statement aimed at spurring the government into action, the Bank of Cyprus warned of alarming trends in Cypriot bond yields, which could put at risk Cyprus's ability to finance its debt, despite support from cash-rich domestic banks.

The Bank's statement warns that positive steps should be outlined and swiftly implemented to provide certainty to investors and to prevent a bailout.

“Indecisiveness, disagreements or plain talk without substance are punished; bold actions are rewarded," the bank stated. "[The Bank of Cyprus] has the capital and the ability to support the state’s policies, provided they are characterized by effectiveness and vision; provided they get the country out of the crisis, leading it to progress and prosperity on the basis of a modern European economy - free of perceptions that corrode [Cyprus's] competitiveness."

"Each day of inaction increases problems and risks, which is why we must act today, not tomorrow," the Bank warned.

Despite some progress on reining in the budget deficit, which is expected to fall from 5.3% of GDP in 2010 to 4% in 2011, the Cypriot economy has been rocked by the July 11 explosion of a munitions cache which damaged Cyprus's largest power station, causing nationwide blackouts and disruption to business, and saddling the government with an estimated EUR3bn in clean-up costs. In addition, there is further political uncertainty following the the Cabinet's decision to tender its resignation amid the ensuing public outcry.

The government has said that it has sufficient funds to meet its obligations until December 2011, but after that it would need to investigate further financing for its debt.

Any bailout of Cyprus would be nominal in comparison to earlier bailouts in respect of Greece, Ireland and Portugal, with total support for these nations now totalling EUR382bn. The Cypriot economy accounts for a mere fraction of the Eurozone's GDP, and its financing needs would therefore be significantly lower.

However, inaction leading to a bailout, the Bank has warned, could have significant ramifications for the island as an international financial centre, in terms of reputation and investor confidence, and international pressure could be exerted on Cyprus to increase taxes, potentially leading to a tax regime that is less conducive to investors.

TAGS: tax | business | fiscal policy | banking | capital markets | international financial centres (IFC) | budget | offshore | offshore banking | Cyprus

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