With its banks still maintaining capital controls, unemployment worsening, and the government relying on international loans to keep the economy intact, Cypriot Finance Minister Harris Georgiades nonetheless said the situation is improving, only eight months after it first asked for a rescue package.
Georgiades told CNBC: “We have exited the danger zone, we are stabilizing the situation, we are taking control of the situation, the challenges of course remain, but I think this is what the rating agencies are beginning to register.”
Cyprus had its credit rating raised from B-/B from CCC plus/C by ratings agency Standard & Poor’s last month. The agency argued that the immediate risks to Cyprus’ austerity program had receded.
There could be a long way back though. The biggest state bank, Bank of Cyprus, was recapitalized under the bailout scheme, while another closed down and depositors with more than 100,000 euros ($137,000) in their accounts lost half their savings which were confiscated to help pay for mistakes the banks made in bad loans to Greek businesses that went belly-up in that country’s economic crisis and large holdings in Greek bonds that were devalued 74 percent.
Cypriots still cannot use checks or withdraw more than 300 euros ($406 pe day. The nation aims to scrap capital restrictions in early 2014, Georgiades, who was speaking after a meeting with U.S. officials, said. Those were supposed to have been in place only for a few weeks though, and then only for a few months but the limit drags on.
“The method of the gradual but steady relaxation is the correct one under the circumstances and we shall continue,” he said.
One of the key issues is of outright capital controls for foreign transfers. This is one way in which Cyprus’s banking system has complicated its European Union rescue.
Its banks are characterized by huge reliance on depositor funding, and relatively few equity- and bondholders, which means that the buffer between the bank and its savers is reduced.