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March 25, 2012 5:20 pm
Cyprus is risking a further blow to its economic credibility by signalling that its internationally respected central bank governor is unlikely to be reappointed when his five-year term expires at the end of April.
Athanasios Orphanides, a former senior economist at the US Federal Reserve, steered Cyprus into the eurozone in 2008. But he has become a controversial figure in Nicosia after clashing publicly with the communist government over its reluctance to curb spending and launch structural reforms.
That makes his reappointment unlikely, said people familiar with the government’s thinking. “Nobody in the banking sector expects him to stay,” said one.
His departure would be a setback for the European Central Bank, where Mr Orphanides is a member of the 23-strong governing council. People familiar with its deliberations said his academic expertise on central bank policy during crises had helped boost the ECB’s intellectual firepower and he had contributed significantly to debates.
In Nicosia, his early warnings that without swift fiscal consolidation, the Greek Cypriot economy would face difficulty weathering the global financial crisis were dismissed by President Demetris Christofias and his advisers, as Russian businesses deposited billions of euros in Cypriot banks and individual investors flocked to buy luxury homes on the island.
However, the country’s perilous public finances have raised fears that it may be next in line to seek a European Union bailout. “The central bank governor was quite right as it turned out, but that didn’t make him more popular with the president and the [Akel communist] party,” said a leading Greek Cypriot businessman.
The government used much of a €2.5bn bilateral loan from Russia to cover last year’s budget deficit after being shut out of international capital markets because of concern that its banking sector was overexposed to Greece.
Its two largest commercial banks have to raise more than €2bn of fresh capital by mid-year to offset losses on Greek bond holdings following this month’s partial default by Athens and a sharp rise in non-performing loans at their branches in Greece.
The weaknesses of the Greek Cypriot banking sector also exposed Mr Orphanides to criticism for not strengthening supervision immediately after Nicosia joined the euro. “At this point, the role of the central bank is just as much to move towards adequate supervision as to contribute to ECB policy-making,” said Stelios Platis, a Greek Cypriot economist.
The frontrunner to succeed Mr Orphanides is Cambridge University-trained Panicos Demetriades, professor of financial economics at Leicester University in the UK. Mr Demetriades has called for Germany to readopt the Deutschemark to prevent a costly restructuring of the debt of peripheral eurozone member states.
“Without Germany in the eurozone, the euro would quickly depreciate to a level that would help reinstate the competitiveness of the periphery,” he wrote in a letter to the Financial Times in May 2011.
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