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CNBC Interview: Minister of Finance for Cyprus, Harris Georgiades

Following is the unofficial transcript of a CNBC interview with Harris Georgiades, Minister of Finance for Cyprus, by Julia Chatterley at the IMF Spring Meetings, Washington, on Monday 20th April 2015.

Julia Chatterley (JC): So we were hoping for some good news on the foreclosure law to release the delayed IMF repayment, what's the latest there?

Harris Georgiades (HG): Well it will, err (bumbled), the ratification there, the enactment of the foreclosure law is yet another important step in the direction of implementing a very ambitious but very, very, very necessary reform program for the Cyprus economy. So this is yet another step in this direction. The Cypriot economy has been making steady steps towards recovery and we are maintaining this effort through such improvements, both in our legal framework but also in key sectors of, of, of, of the economy, of policies and of the public administration. We are essentially creating the foundations for a much more healthy and viable economic model for Cyprus.

JC: It's also quite crucial on a market level too because it could ultimately unlock access to the QE program for Cyprus. There's still a vast difference between the likes of your spreads and other former program countries, the likes of Spain and Portugal for example

HG: Well yes indeed, and the QE program has essentially been designed for economies like ours, to offer a helping hand, not to replace the difficult effort of implementing reform and fiscal consolidation but by supplementing it and giving a helping hand when this effort is well underway. So yes we are positive that very soon we shall be able to confirm that market access for Cyprus has been re-established and this is sustainable. Enabling us in this way to successfully complete the program by the end of the year or the beginning of the new year.

JC: How quickly are you talking? Are we talking about seeing you get full market access, are we talking about you issuing longer-term debt at this stage? Can you give us any kind of time frame?

HG: Within this year. We, we are very confident that we have already established the conditions and that we are already in a position to regain the confidence of the markets. The, the economy of Cyprus is very formed economy already, it is one which is edging out of the recession, our banking sector has been completely reformed and we are continuing with implementation of an ambitious reform program. So, so this creates, together with resilience of key sectors of the economy, this creates conditions of confidence which is what the markets will be evaluating and we are very confident.

JC: You've mentioned the word "confidence", it does come down to perceptions as far as Cyprus is concerned and I can't therefore not talk about the situation right now in Greece. Can I just get a sense of what the current exposure is of Cyprus to Greece at this stage?

HG: Well, um, there isn't an issue of exposure. There was one until two years ago when our banking sector, the Cypriot banking sector, was very exposed to the Greek market, but that was terminated two years ago. So, there isn't any link beyond the normal array of commercial and economic ties which exist between all members of, of the Eurozone.

JC: Can you quantify that for us? Just a guesstimate in terms of size, what are we talking?

HG: Um, ah, I don't think that's something I can easily quantify but if we are talking about the banking sector which is probably the most vulnerable, there are no ties. Let me emphasize that I do hope, and I want to be optimistic, that the, er, Greece will be able to stay clear of any trouble, er, but in any case, our economy is following its own course, we are well on track in the implementation of our own program of reform and consolidation. We are now have a much more stable economy so we are not concerned about such issues of overexposure to another economy.

JC: So just to clarify and just to be clear on this, as far as Greek subsidiary banks operating in Cyprus, they have zero exposure now to the Greek sovereign?

HG: Essentially there are some Greek-owned banks subsidiaries operating in Cyprus but those are separate banks, essentially they are Cypriot banks, fully capitalised with a comfortable liquidity position, now supervised not only by the Cyprus Central Bank but also by the European Central Bank so we feel very comfortable and we think that their presence actually is very beneficial for our banking sector.

JC: Have they been forced, though, to minimise their exposure to Greece in recent weeks?

HG: Well, I can't talk on behalf of either the Cyprus or the European Central Bank but I can say there has been satisfactory supervisory action.

JC: As a government have you made contingency plans? You said that you hoped that the situation with Greece is resolved which I think many countries, all countries, in the Eurozone do, but have you made contingency plans if the situation doesn't resolve itself?

HG: Um, I do not even want to discuss the possibility of the Greek situation turning, getting a turn for the worse. I want to be optimistic that we shall be able to find a resolution. Greece has made good progress during the last few years. This has to be acknowledged. I also feel that the commitments of the new Greek government to continue implementing a reform program have also to be, must also be noted and hopefully this will create the foundations for a resolution of what is currently an unstable situation. But no, I do not even want to speculate or to discuss the possibility of a negative outcome.

JC: You know it's interesting when we talk about Cyprus and we talk about the fact that you've now fully removed capital controls. There's surprise actually I think in the market that you've dealt so well with those capital controls and actually they didn't have quite the detrimental impact on the economy that perhaps could have been expected, the fear surrounding capital controls for a country in the Eurozone, would you agree with that?

HG: Well yes I would, I, in fact it's yet another example of how much more positively we have been able to manage what appeared two years' ago as an almost unmanageable situation, an unprecedented crisis. But the Cypriot economy has proved to be much more resilient than originally expected and what you say, the full lifting of those capital restrictions, which were necessary back then, is yet another example of the full re-establishment of stability and the normal operations of our economy and especially the lifting of these restrictions, the capital controls, shows that our banking sector is now completely stable and able to start serving the real needs and to finance the real needs of the economy. So I think it's yet another example of, which confirms that we are on the right track.

JC: You're also seeing the return of Russian and Chinese money despite what happened. Depositors willing to invest in your country. Is that true also, that actually despite all the crisis and what happened as far as Cyprus is concerned, you're still seen as an attractive place to do banking business?

HG: Well erm, what's more important, is that we are not attracting only deposits, we're attracting real business. And that's how we want to remodel our, our economy. Not simply as a, as a safe place to maintain deposits, well that also, but primarily as a destination to do business – to invest, to start a new venture, to buy a holiday house – and that's what many non-Cypriots have been doing – and indeed, to spend a holiday. So this represents the wide, let's say, array of opportunities that Cyprus presents to foreign investors and we have indeed been, we have indeed been seeing a re-establishment of foreign investment, even in our banking sector, not with deposits but with actual equity participation in our banks but also in sectors like the property sector, the tourist industry, the up-and-coming energy sector and others.

JC: John Hourican of the Bank of Cyprus recently said that there's still not been a separation of politics from banking in Cyprus and that still needs to happen - is he wrong?

HG: No, I think it has happened and his presence, John Hourican's presence at the helm of the main banking institution, of a highly skilled and successful non-Cypriot banker, a is a manifestation that our banking sector has left behind the mistaken practices of the past. We have a smaller banking sector but it is better managed, better supervised, better capitalized, primarily through the presence of new foreign investors and I think this is the best answer to any concerns and the best confirmation that, essentially, we have a completely new and much healthier banking sector.

JC: The FT recently reported that there were thirty-five million euros worth of unpaid loans from MPs that are caught up with this foreclosure and the enactment of this foreclosure law. Are they going to be made to pay too?

HG: Um, I think that has been a rather exaggerated representation because of the thirty-five million. If I remember correctly, the twenty-eight belong to a major land development company, which is related to an elected member of parliament so yes there is no preferential treatment for anyone and achieving viable restructurings whether it's a need is one thing but believing that somebody can receive a loan and fail to repay it it's a completely different story and we are ensuring through new legislation and new procedures that this will not be allowed to happen.

JC: So this is a new Cyprus?

HG: I think it is but one which retains everything that was good and healthy with Cyprus in any case – all the comparative advantages of the Cypriot economy have been retained but at the same time it is new in the sense that we have made, over the last two years, we have made the best out of the crisis situation, turning it into an opportunity to rectify everything that was wrong or ill-balanced and which led an otherwise healthy economy into its recent troubles.

JC: So programs do work?

HG: Definitely and I think we have – we are offering a tangible example of a successful program implementation and also one which shows that the austerity or growth dilemma is a false one. It's not an either or. It's…for us, it's a definite choice of fiscal consolidation on the one hand and economic recovery at the same time. And that's what we have been doing during the last two years. Our economy's not being driven into a deeper and deeper recession because of the implementation of a program, but on the contrary, it's edging out of the recession already because we are implementing a program for which we have claimed ownership because it includes a much needed structural reform and positive changes which complement the comparative advantages of our economy.

JC: Is there a lesson for the new Greek government in what you've done?

HG: No, I don't feel that I should be offering lessons to anyone or that the Cyprus example should be a lesson to anyone. If anything, our, our recent mistakes, the, the indecision of our recent past, the failure to act in a timely and decisive manner, the feeling that we can hide problems under the carpet should be, well, an example to be avoided. So I don't think that I am entitled to offer lessons to anyone. But we…back in Cyprus we're trying to learn from good examples like the example of Ireland, like the example of Portugal who were also faced with economic difficulties, they did go through an equally difficult but necessary reform and consolidation program and are now back on healthy growth. That's what we are trying to implement in Cyprus also.

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