Transcript of a Conference Call on Cyprus

August 7, 2013

Nicosia, Cyprus
Wednesday, July 31, 2013

Delia Velculescu, Mission Chief for Cyprus
Ángela Gaviria, Communications Department

MS. GAVIRIA: Thank you. Welcome to this conference call on the conclusion of the mission to Cyprus to discuss with the authorities the first review of the country’s economic program which is supported, on the IMF’s side, by an Extended Fund Facility arrangement or EFF. We have published a joint statement with the European Commission and the European Central Bank on the conclusion of this visit. Let me now introduce the Mission Chief for Cyprus, Delia Velculescu. She will make brief remarks to get started and then she will answer your questions.

MS. VELCULESCU: Thank you and hello, everybody. Let me start by giving you a brief overview of where we are following the conclusion of the first program review mission to Cyprus. This review assesses progress toward the program's objectives. These objectives are to restore financial stability and fiscal sustainability which, together with structural reforms, are needed to restore Cyprus' sustainable long-run growth.

This first review has found the program to be on track, with the authorities having made good progress toward meeting their objectives.

First, Bank of Cyprus which, together with Laiki Bank, was put under resolution in March, has now been fully recapitalized and taken out of resolution. This represents a key step toward restoring normal operations for this bank, although much remains to be done for Bank of Cyprus to adapt its business model to the new circumstances.

Second, there is a concrete plan in place to recapitalize other banks, including recapitalizing and restructuring Cyprus's cooperative credit sector. This will be done with program resources as needed, and will not require depositor involvement.

Third, the authorities are developing a milestone-based roadmap to gradually relax capital controls in an orderly way, in line with progress in the overall banking strategy. The authorities aim to publish this roadmap.

Fourth, measures will be taken to strengthen financial sector supervision and regulation, and enhance implementation of the Anti-Money Laundering framework.

Turning to fiscal policies, the measures implemented at the end of last year and in April of this year, together with prudent budget execution, have led to a better fiscal performance, measured against program targets through end-June of this year. Nevertheless, still high uncertainty surrounding the macroeconomic outlook calls for continued fiscal prudence going forward.

On the macroeconomic outlook, available economic indicators do not indicate that revisions to the macroeconomic projections underlying the program are warranted at this time. However, uncertainty remains large.

Finally, on structural reforms, the authorities are embarking on an ambitious reform agenda to modernize their fiscal institutions. I will highlight two examples.

First, revenue administration will be overhauled to enhance its efficiency and improve tax collections. The authorities will also take measures to fight tax evasion.

Second, the authorities will reform the welfare system to improve its targeting, expand coverage to those that are in need but are now outside the system, and streamline overlapping benefits. This is critical at this difficult time, as the economy is adjusting and unemployment is reaching unacceptable levels.

In sum, the authorities have made good progress in program implementation, and have set an ambitious agenda for the months to come. Still, with large risks still clouding the outlook, fiscal prudence and strong and timely policy implementation are critical for the program's success.

QUESTIONER: Yes, hello. I actually have two questions. First, you said that much remains to be done for Bank of Cyprus to adapt the business model to the new circumstances. Could you give us more details about these measures that you've identified? And the second question is in a wider context. What do you think will be the consequences, long term, for the euro zone banking system of this Cyprus crisis?

MS. VELCULESCU: On your first question, Bank of Cyprus will need to prepare its own business and restructuring plan to demonstrate viability going forward. We are not proposing any specific measures at this point. We will be reviewing the restructuring plans once they are being finalized. On your second question, this review assessed the Cypriot economy, and the authorities' plan to ensure that long-run growth for Cyprus can be restored. I will not be able to address your question on broader euro zone issues.

QUESTIONER: I just wanted to get your views on what you see as the key short-term risks at the moment. You mentioned instability clouds the picture.

MS. VELCULESCU: Yes. The key short-term risks relate to macroeconomic uncertainties regarding the recession underway, stemming from: the deep restructuring of the banking sector that has been taking place; the imposition of capital controls and administrative restrictions, which were necessary to preserve financial sector stability; and from the need to adapt Cyprus's business model away from the large reliance on financial sector services.

QUESTIONER: I would like to know when the next review is scheduled to take place.

MS. VELCULESCU: The Cyprus program is on a quarterly review basis. This means that the troika --that is the International Monetary Fund, European Commission, and European Central Bank-- will visit Cyprus every three months from now on to review progress in implementation of program policies.

QUESTIONER: We talked a little bit about Bank of Cyprus and the recapitalization. In light of the short-term risks you just talked about on the macro level of the economy, are you confident that at 12 percent, core Tier 1 level is enough to carry the bank through to the end of the program period?

MS. VELCULESCU: Thanks for the question. The Central Bank of Cyprus, as the resolution authority, has assessed the risks going forward and decided to finalize the recapitalization of Bank of Cyprus on the basis of a recent independent fair-value assessment of its balance sheets. The result of that assessment was that an initial core Tier 1 of 12 percent, which takes into account losses that will materialize in the future, can sustain risks going forward.

We will continue to monitor this situation very carefully as we go along.

QUESTIONER: When do you project capital controls to be fully lifted? Some have said two years. Could they be lifted earlier than that?

MS. VELCULESCU: As I have said, the authorities are developing a roadmap for the lifting of administrative restrictions and capital controls. This roadmap is going to be linked to specific milestones in their banking sector strategy as I have described earlier, relating to the recapitalization and restructuring of the entire banking sector.

This roadmap will be published. It is not time-bound, as it depends on when the authorities will be able to reach particular milestones. It will also be linked to developments in the financial sector at large, the liquidity situation of the banks, and deposit developments.

QUESTIONER: Is there going to be a role for the gold held by the central bank in Cyprus' program, as has been suggested previously?

MS. VELCULESCU: This is being considered. However, no measures have been taken at this point in this regard.

QUESTIONER: It's a technical question on the conversion of Bank of Cyprus deposits. I understand that the original plan was that the hair-cut deposits become Class A shareholders. And from the statements yesterday, it looks as though all shareholders would have the same status. Are you able to comment on that, so as in the original shareholders, but also the new shareholders?

MS. VELCULESCU: I can refer you to the Central Bank of Cyprus website, where the details are explained.

QUESTIONER: Delia, correct me if I'm wrong, but the Executive Board of the IMF is going to discuss this review around September 20th, and probably by the beginning of September you're going to submit your report. And by the end of August, we have the macroeconomic data of the second quarter. If these data show different results than you predict, can you revise your report to the Board?

MS. VELCULESCU: Sure. Let me explain the timeline: we are expecting the Executive Board to review our report on Cyprus around the middle of September. And, indeed, the Q2 growth data will come in in the middle of August.

We will inform our Board in early September if there are any significant developments that are different from the current projections. As we will come back here in three months' time, we will consider at that point whether a revision is necessary, taking into account the Q2 data release, as well as any other information that becomes available by that time.

MS. GAVIRIA: We end this conference call here. Thank you all for participating.
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