A reunited Cyprus could face fiscal problems unless the new federal state adopts rules on fiscal discipline and financial sector discipline.
In an interview with the Financial Times, the South’s finance minister Harris Georgiades has warned that there must be a balanced budget clause enshrined in the constitution of the new state which would place fiscal responsibility on the federal government and independent Greek and Turkish Cypriot financial institutions the run the daily affairs of both communities.
“It is imperative that the new union doesn’t allow itself to face fiscal issues and that one of the two constituent states doesn’t steer off course, because the federal union itself would then be in trouble,” Georgiades said.
He was thinking in the main, of the Turkish Cypriot future component state which has, for decades, heavily relied on financial support from Ankara. The Turkish Cypriots would require a transitional period, financed internationally, before operating alone under tight new fiscal rules, he said.
The Turkish Cypriot banking sector would also need close scrutiny, he said. “It’s a bit of a wild-west situation. Nobody knows enough about ownership, capitalisation and supervision in the Turkish Cypriot banking system,” he said.
However, writing in her column for Cyprus Weekly, Fiona Mullen says that Turkish Cypriot banks are more liquid than Greek Cypriot banks. They hold more on deposit than they have paid out in loans.
“Nor does the size of the loan book ring any alarm bells. With GDP in the north of around €3bn, the Turkish Cypriot loan book is around 110% of GDP. In the south, the loan book in November was over 360% of GDP. Moreover, as we all know, around half of that loan book is non-performing”, Mullen says.
In addition, she has been told that non-performing loans in the North are only at 8%.
“In sum, therefore, the Turkish Cypriots banks appear to be in good shape, at least at aggregate level. This does not mean that individual banks will not any face issues when they all have to implement the full force of Eurozone rules”.
She concludes that Turkish Cypriots banks are not quite the “Wild West” as the Greek Cypriot finance minister described.
Financial Time, Cyprus Weekly
