Cyprus eyes bank fund worth $700 million

AP News
Posted: Mar 28, 2011 12:46 PM
Cyprus eyes bank fund worth $700 million

Cyprus' Central Bank governor said Monday that a proposed bank stability fund needs at least euro500 million ($700 million), or 3 percent of the island's GDP, to sufficiently backstop the financial sector in case it runs into trouble.

Athanasios Orphanides said the independent fund _ which is due to be set up within the next six months according to Central bank regulations _ is essential to ensuring the financial sector's credibility regardless of how the island's public finances are faring.

"This is a size that is comparable to equivalent funds being created in other countries and especially in our case with such a large financial system," said Orphanides, calling the euro500 million "an initial target."

The fund's creation is part of a revised draft bill awaiting legislative approval. The bill also provides for a two-year, 0.095 percent tax on commercial and cooperative bank deposits which is projected to raise euro120 million ($168 million). Some euro50 million would be put into the fund and the rest would go into state coffers to reduce the fiscal deficit.

Orphanides said the bill is an improvement on an earlier draft that foresaw a capital base for the fund of only euro50 million.

Moody's Investors Services ratings agency said last week that euro50 million was "insignificant" relative to the banking system's possible needs, given its total assets of about euro110 billion ($154.3 billion) _ or 6.5 times the islands' gross domestic product.

Last month, Moody's cut its rating on Cypriot government bonds by two notches with a stable outlook amid concerns over public accounts and banks' exposure to debt-ridden Greece. S&P cut its grade by one notch with a negative outlook in November because of similar concerns.

The Fitch ratings agency put Cyprus on notice in January for a possible downgrade, but noted it did not expect the AA minus rating to be lowered by more than one notch.

Orphanides said he wants to see the entire euro120 million bank tax eventually deposited into the stability fund, something that Finance Minister Stavrakis appeared to oppose.

"We as a government are mindful of public finances and our efforts to improve our revenues from the banks so that we aren't forced to impose new taxes or cut spending that goes to the ordinary citizen," Stavrakis said.

Cyprus, a euro member, introduced a euro175 million ($245.5 million) austerity package in this year's euro8.02 billion ($11.25 billion) state budget to fulfill a promise to the European Union to halve a 6 percent deficit by 2012. The EU has a 3 percent deficit limit, though the rule has been broadly broken after countries' public debts were bloated by the financial crisis.

Among the cost cutting measures is a pledge to trim 3,000 jobs from a government work force of 53,000 in the country of 800,000.