Sponsorship of the Annual Economic Lecture of CES

Bank of Cyprus sponsors

Annual Economics Lecture by CES

Speaker: Governor of Central Bank of Cyprus, Mr. Athanasios Orphanides,

on “The Crisis of Public Debt.”

The Bank of Cyprus, in its efforts to inform the wider economic and business community of Cyprus and to help provide answers to questions that may arise as a result of the current economic climate, has organized alongside the Cyprus Economic Society (CES) and the School of Economics and Business of the University of Cyprus, the Annual Economics Lecture by CES. The Annual Economics Lecture is an institution which began in 1991 in order to help disseminate research on issues of economic policy.

The speaker at this year’s Annual Lecture was Cyprus Central Bank Governor, Mr. Athanasios Orphanides who presented the topic: “The Crisis of Public Debt.”

The lecture was introduced by Mr. Yiannis Kypri, Deputy CEO of the Bank of Cyprus Group, who made a brief reference to the historical development of the international financial crisis.

In his speech, the Governor of the Central Bank noted that “the trust enjoyed by the establishment of the euro zone has been seriously shaken in the past two years as, the vision of cooperation and solidarity amongst its members is collapsing.” Mr. Orphanides has suggested that since the end of 2011, questions were raised concerning the very survival of the euro; questions that were once considered taboo. Until then it was not just Greece that was facing problems. “After Greece, a number of member states have encountered difficulties in refinancing their debt or have completely lost their access to markets, despite the application of fiscal adjustment programs.” What was at fault? What caused this dramatic erosion of trust? Beyond the self-evident reasons – financial irregularities, loss of competitiveness, etc – the main reason behind the spread of this crisis in to so many countries of the euro zone, the CBC Governor noted, “is the lack of planning in the euro zone. The problem lies mainly in the hands of the governments. EU leaders failed to collectively persuade the world that they can address the problem effectively.

“Instead of a decision capable of solving the problem, the EU leaders made the decision to introduce a new parameter in the government debt markets at the Summit Meeting at Deauville in October 2010: to impose upon their investors/creditors to absorb losses in the case of a state suffering from cash flow problems.” According to Mr. Orphanides, this was how the “message that the market for government debt in the euro zone should no longer be considered safe” was transmitted. A few months later, in July and then again in October 2011, Greek debt holders were forced to absorb losses. “Thus, they reinforced the idea that investors in government debt in the euro zone must be prepared to suffer losses even under conditions which do not necessarily lead to equivalent losses for states outside the euro zone. Investors immediately showed their lack of confidence in the euro zone by abandoning the euro zone government debt. The contagion of the crisis was evident in the yields of the bonds of all member states following the aforementioned Summit Meeting.”

Although European leaders have changed tactics by announcing on December 9, 2011 a change in overall decision concerning loss absorption from the private sector (PSI) in cases where a state is facing cash flow problems, investors are still not satisfied, Mr. Orphanides suggested. “Not even the important steps in terms of euro governance with the ‘Fiscal Contract’ seem to have restored full confidence.”

What else do we as a euro zone need to make a collective conviction? According to Mr. Orphanides, what is necessary is “immediate and strict implementation of the new ‘Fiscal Contract’ without the typical filibustering which has been prevalent in crisis management over the past two years throughout the management of the crisis.” More importantly, however, Mr. Orphanides concluded, “it is the demonstration, finally, of the necessary mutual solidarity for which, as former German Chancellor Helmut Schmidt put it, ‘we are morally and legally committed to, by Articles 3 and 5 of the Treaty.’”

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