Athanasios Orphanides: Interview with Reuters
Interview with Mr Athanasios Orphanides, Governor of the Central Bank of Cyprus, by
Michele Kambas and Sakari Suonimen, conducted on 19 April 2011.
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Q. Do you think that there will be any implications for the eurozone from putting US on
credit watch negative?
Overall, we should keep in mind that as a result of the crisis over the past three years, in a
number of countries in the developed world, government debt has increased considerably.
This is something that has affected a number of countries - including the United States and
member states in the euro area. Governments around the world have recognised that
continued increases in debt would be unsustainable and are taking steps to return the fiscal
path towards sustainability. My interpretation of the decision by Standard and Poor's is that it
reflects the ongoing budget discussions in the United States. I have no reason to believe that
the United States' government and Congress will not live up to their responsibilities, as I
have no reason to believe that euro area governments will not live up to their responsibilities
and ensure that their fiscal situation is under control.
Q. How do you see uncertainty and outlook?
A number of reasons have contributed to increased uncertainty in the past several weeks.
Let me remind you of the tragic events in Japan with the earthquake and tsunami as one
example that has elevated uncertainty. Let me also remind you of the political troubles that
are observed in some countries in the Middle East and North Africa.
The factors I have noted are factors that have added to the uncertainty for the outlook for
inflation and growth worldwide and in the euro area. Let me also point out the following.
Once again, we are observing an increase in food and energy and other commodity prices.
This is adding to the risk of upward pressures of inflation. At the same time, it is a dampener
on growth. These are real factors that I believe have raised the uncertainty for the outlook
both for inflation and for growth.
Q. How do you see the inflation and growth outlook?
We constantly monitor developments in the outlook for growth and inflation. Our mandate is
to maintain price stability over the medium term. We always try to balance the upside and
downside risks of deviating from our mandate, so with new developments we always
revaluate the situation.
The developments since the March projection staff exercise give me reason to believe that
the near-term pressures on inflation are elevated. In the near-term, the risks are to the
upside. That said, we continue to observe that longer-term inflation expectations remain well
anchored. I do not think we have evidence of inflation pressures persisting beyond the near
term. Over the longer term I see price stability being maintained in line with our mandate.
This hump in inflation is largely due to the food and energy price pick-up that we have seen
and that has become worse in recent months. However, at the moment, we have no reason
to believe this would be more persistent.
The growth situation maybe a little bit trickier to analyse. The events in Japan and the
continuing events in the Middle East and North Africa could be interpreted as a downside risk
on growth. At the same time, we see continued evidence of rather robust growth in some
parts of the euro area, so I would not say that the overall growth outlook has shifted
downwards despite the negative events I mentioned earlier. The risks may be to the
downside, but my baseline scenario has not shifted.
Q. How would you describe the monetary policy stance. Is it appropriate now?
When it comes to interest rates, I would say that monetary policy is accommodative. In my
view, it is appropriately accommodative. It is appropriately accommodative in the sense that
we still have some way to go towards repairing the damage that has been experienced as a
result of the crisis we have been living through during the past three years.
Q. Does that mean that you don't see interest rates going up for, say, over the next
three months?
As you know, the Governing Council of the ECB never pre-commits on interest rate policy
decisions. And personally I believe that it's not useful to try to forecast the evolution of policy
rates. What is more important is to monitor the evolution of the real economy and try to
continuously monitor and form an assessment of the inflation risks. If the evolution of the
economy over the next few months is such that there are greater upside risks to inflation, I
believe that would justify removing some of the accommodation that is currently in place. If,
on the other hand, some of the more negative scenarios with respect to the economy
materialise and we see inflation risks abating, then that would not be the appropriate
reaction.
Q. Could you phase out more non-standard measures soon?
As the liquidity needs of the banking system become less pressing and as the transmission
mechanism of monetary policy becomes less impaired, there would clearly be less need for
continuing with the non-standard measures to the same degree.
Q. How do you see the state of the money markets right now? Are they improving so
that further phasing out could be warranted?
Overall, the money market is in a much better condition than it was earlier in the crisis, even
though I would have to say that we are not anywhere near normal conditions we had before
the turbulences started in 2007.
I can envision that as time goes by, it will no longer be necessary to maintain full allotment in
all operations.
Q. Should the interest rate corridor be rewidened?
As president Trichet explained in the press conference following the April policy meeting,
there were arguments on both sides. We took the decision not to rewiden the interest rate
corridor to its normal size at the April meeting. However, going forward, I would argue in
favour of normalising the width of the corridor sooner rather than later. In my view, it is
increasingly harder to justify the non-standard width of the corridor as time goes by.
I don't think there is any mechanical link between the decision as to when to phase out
specific non-standard measures that have been introduced during the crisis.
Q. On bond buying programme. What is your point of view with Greece, Ireland and
Portugal being in the hands of the EU and IMF? Does it give rise to the need for the
ECB to intervene?
It is increasingly hard to justify the continuation of the SMP in light of the fact that it was
introduced in order to alleviate some of the dysfunction in the monetary policy transmission
mechanism in some markets, and I do not think that those conditions hold at the moment to
the same extent.
Q. Do you think it should be stopped completely or just be there in case the need
arises again?
The mere presence of the programme, even if no purchases at all are made for a very long
time, can be a stabilising force in the markets in case additional tensions appear on the
horizon. That would be an argument for keeping the programme in place while recognising
that it may not be employed unless unusual circumstances appear.
Q. How would you evaluate the programme. Has it been a success?
The programme has been a success. One has to ask what is the counterfactual for what
would have happened in the euro area had the programme not been in place. In the dramatic
situation that we were facing in May 2010, the damage that could have resulted from the
absence of this programme could have been quite severe.
Q. Is the transmission mechanism working now?
Speaking for myself, I have less concern for the transmission of monetary policy today than
in May 2010 when it was introduced.
Q. Could Portugal government bonds be extended similar treatment as Greece and
Ireland regarding collateral use in ECB operations?
Regarding the eligibility of collateral, as a rule we rely on the rating agencies, but in those
circumstances when we can make an independent evaluation of the country we don't need to
rely on the rating agencies. This has happened in the case of Greece, this is what has
happened in the case of Ireland and I trust that if it becomes necessary to have an
independent evaluation in order to assess the eligibility of collateral of any other sovereign in
the euro area, then this will be done as well.
Q. Do you believe Greece can manage without restructuring its debt, and how likely is
it able to do without one?
Let me first point out that I am saddened by the fact that this public discussion and market
speculation is taking place because it is quite damaging to the euro area overall. As you
know the Greek government at the moment is implementing a tough but appropriate
programme of reform for the Greek economy. This programme was evaluated by the IMF
and the European Commission, in liaison with the ECB. This evaluation has determined that
the debt-deficit dynamics of Greece are indeed sustainable, as long as the programme is
being successfully implemented.
With this in mind, I am puzzled by the continuing questioning of the sustainability of the
Greek debt.
In my mind, restructuring of the Greek debt is not necessary as long as Greece continues to
implement the programme that is in place. But more importantly, I believe that a restructuring
of the Greek debt would be unwise. Under the circumstances, restructuring would be quite
damaging to the Greek economy. In addition I believe it would be quite damaging to the euro
area overall because of the possibility of contagion effects.
Since restructuring is both undesirable and unnecessary I believe that it is not helpful for
officials in the EU to keep bringing it up.
Q. Even though officials continue saying that restructuring is undesirable, this does
not appear to have convinced the markets. We have seen a spike in borrowing costs in
past few days. Do you believe that this debate about restructuring can become a
selffulfilling prophecy?
In the case of a euro area member state, and Greece is a euro area member state, talk of
restructuring cannot become a self-fulfilling prophecy in the same sense that could have
been the case for other countries that are not part of the European Union. The reason for
that is very simple; in the European Union a member state can count on political support and
solidarity from other member states. It would take a political decision against supporting a
member state in need in order to force a restructuring in the sense you describe.
So in my view, to the extent the Greek government continues to implement the programme of
structural reforms that it is implementing right now, and to the extent that it recognises that a
restructuring would be undesirable and unnecessary, then restructuring can be avoided so
long as the Greek government enjoys the support of other member states in the European
Union. Under these circumstances the support from other member states is critical.
Q. Greece is expected to go back to the markets next year. Do you think this could still
happen or do you think there is a need to extend the programme?
I think this will be evaluated as time goes by. I have to say that one of the difficulties we are
experiencing in markets right now reflects the fact that at a political level, in the European
Union, we have disappointed market expectations by failing to make sufficient progress
towards strengthening euro area governance and towards putting in place a robust crisis
management framework. It is a price that we unfortunately have to pay for the delay. This
delay is causing uncertainty in markets and this uncertainty is damaging the euro area.
Q. If the euro area has not come up with a comprehensive plan to handle the crisis,
how can it be expected to support Greece?
As you know, European Union governments are currently offering support to Greece in the
form of loans subject to strict conditionality and I fully expect this support will continue as
long as Greece continues to implement the structural reforms that are necessary in order to
restore healthy fiscal finances. At the same time those reforms will promote growth in
Greece, which at the end of the day is necessary in order to alleviate the debt burden.
Q. There seems to be in the general population less and less appetite for continuation
of reforms. Do you see that as a real problem or will they definitely do what is
necessary to get onto a sustainable path?
I expect the Greek government to live up to its responsibility and continue with the
implementation of the reform programme. I do observe frustration in the Greek people and
frankly I believe a lot of this frustration is entirely justified. The Greek public was unprepared
for the sacrifices that it now has to make because successive Greek governments gave the
impression to the Greek citizens that they could be living a lifestyle that they should have
known was beyond the means of the country. Frustration, I think, is entirely justified. At the
same time I trust that now the situation is clear; there is much better information about the
necessary adjustment and the Greek people will persevere.
Q. What can the ECB do to help Greece? Is there anything else to do apart from eased
collateral requirements for Greek government debt?
If I may correct you, I would not say that we have eased collateral requirements. What we
have done is eased the reliance on credit rating agencies for evaluating the collateral for a
very specific reason. This is because our assessment of the sustainability of the Greek debt
situation and the path of the Greek economy is different from what is reflected in credit
ratings. We have made our own assessment in the case of Greece.
In terms of your question on how the ECB can help, as you know the ECB is helping by
providing advice and by being present in the discussions that are associated with the
programme that involves the IMF and the European Commission in liaison with the ECB. But
beyond that, it is not the ECB's role to have additional involvement. What we have in the
case of the European Union is additional responsibilities for crisis management, which are
responsibilities of the governments in the euro area, not the responsibility of the ECB.
Q. The Irish Central Bank has an emergency liquidity assistance programme. Do you
think there could be a similar one for Greece or is there actually already one in place?
I would not comment on emergency liquidity assistance. This is a national responsibility that
each national central bank in the euro area may apply as is necessary in their own context.
Q. Cypriot banks hold a sizeable quantity of Greek debt. How damaging or potentially
damaging could that exposure be? Could the Central Bank have taken any steps to
limit banks exposure to a single borrower?
With respect to the exposure of Cypriot banks to Greek debt, we have examined the situation
and we have come to the conclusion that even though there is exposure in our banking
system, that exposure is manageable because our banks are very well capitalized.
So even in the highly unlikely situation, if you wanted to run the counter factual, for example,
of imposing losses on the holdings of Greek debt, our banks would manage to weather that.
To understand how well capitalised our banking system is, a comparison may be useful. Our
banks already meet the stricter capital requirements that are being phased in under Basel III.
By contrast, in some other member states in the euro area there have been explicit
calculations about how much additional capital would need to be infused into banking
systems in order to meet those requirements. This is testament to the very strong capital
position of our banking system.
Regarding steps to limit exposure by any of our banks to any sovereign holdings in the euro
area, as part of the supervisory process of the Central Bank of Cyprus we demand that all of
our banks have good risk management systems in place. Of course, we do not control the
specific decisions on portfolio holdings of banks. Whenever we determine that there is undue
concentration of risks then we demand that additional capital be held in order to account for
these risks. This way we manage risks to the system.
Q. Do you agree with an assessment recently made by Cypriot officials and the
finance minister to be precise, that his hands are actually tied in terms of future
ratings of the Republic if rating agencies continue to make a linkage between the
economic fortunes of Greece and the economic fortunes of Cyprus, and do you think
that this linkage is appropriate?
In my view, all authorities must live up to their responsibilities. What we are experiencing in
Cyprus over the past many months is a very unfortunate cycle of downgrades of the
sovereign. In large part, and according to the analysis of the ratings agencies, these
downgrades are due to the fact that as a country we have not yet taken the fiscal
consolidation measures that our government and our parliament agreed were necessary to
implement last year. It is a very costly delay as it raises the cost of financing of our public
debt, it raises the cost of financing by private business, and it reduces employment and
growth opportunities. There are things that can be done in order to reverse this. The policies
that could reverse this deteriorating situation are well known, and they involve shoring up the
long-term public finances of the Republic. So I repeat, all authorities must live up to their
responsibilities.
Q. Would you give me specific examples on how you believe the structural problems
in the Cypriot economy can be addressed? We hear a lot about fiscal consolidation
but what exactly should be done?
I could mention a couple of the things that were already agreed by our parliament and
government last year which unfortunately have not been implemented as of yet, with the
associated damages from the delay. The most obvious I believe, because it has been
repeatedly mentioned, is the sustainability of our pension system. Our government has
repeatedly over the past year stated that the current state of our pension system is, I quote,
"a ticking time bomb which could destroy the Republic." This is something that can be fixed
by changing the parameters of the pension system going forward. Everybody recognises that
these changes need to be made in order to ensure the sustainability of the system and the
longer our country delays making these changes the more costly it will be to solve the
problem. This is one example that is recognised. I do not think we have to look very far. In
my view, it is not the most responsible policy not to defuse what has been recognised as a
ticking time bomb.
Q. How worried are you at the unfolding fiscal situation on the island and the inaction
on the part of the authorities?
I am indeed worried about our government's delay in implementing the necessary fiscal
consolidation measures because, as I mentioned earlier, any further delay raises the cost to
the economy. The unemployment rate is already at historic highs. We do not help the
economy generate additional growth and new jobs by not correcting the fiscal imbalances
that we face. The fiscal imbalances push up the cost of financing on businesses and
discourage investment. I am quite worried about this.