Cyprus Names Central Bank Chief Who Called for German Euro Exit
By Stelios Orphanides – Apr 28, 2012 10:46 AM GMT+0100
Cyprus named Panicos Demetriades as its central bank governor, an economist who called for Germany to ditch the euro.
Demetriades will succeed Athanasios Orphanides as head of the Central Bank of Cyprus on May 3, government spokesman Stefanos Stefanou told reporters in Nicosia today. Because Cyprus is part of the 17-nation euro area, Demetriades will join the European Central Bank’s Governing Council for his five-year term and help set interest rates for the region.
Demetriades inherits an economy in turmoil, with banks reeling from losses on their exposure to Greece and the government unable to borrow on financial markets. Orphanides, a policy maker with 17 years’ experience at the U.S. Federal Reserve, failed to win a second term in office after clashing with the island’s government over fiscal policy and slow pace of economic reforms.
Cyprus, the euro area’s third-smallest economy, needs “serious reforms to improve competitiveness, to improve the functioning of markets, and we have not dealt at all with these key issues,” said Zenon Kontolemis, a former International Monetary Fund economist who now teaches at the University of Cyprus. “We also need reforms of the public sector and of institutions.”
The island’s economy will shrink 0.5 percent this year, according to the ministry of finance. The government on Dec. 23 signed a 2.5 billion euros ($3.3 billion) loan agreement with Russia to finance its 2012 fiscal deficit and maturing debt. The government has also called on the ECB to start buying its sovereign bonds.
Demetriades may not find support among European policy makers for his view that Germany should exit the euro to help peripheral nations regain competitiveness.
“Without Germany in the euro zone, the euro would quickly depreciate to a level that would help reinstate the competitiveness of the periphery,” Demetriades wrote in a letter to the Financial Times published on May 11 last year. Germany’s exit would be preferable to imposing austerity on struggling nations or allowing them to depart, he said.
Demetriades, 53, has a PhD in economics from Cambridge University. He began his career at the Central Bank of Cyprus in 1985 and in 1999 worked in the office of then World Bank Chief Economist Joseph Stiglitz, according his curriculum vitae. Demetriades has been professor of financial economics at the University of Leicester since 2000.
“We wish Panicos Demetriades success in the difficult task he assumes,” Stefanou said.
Orphanides was appointed central bank governor in 2007 to help Cyprus with its transition to the euro in 2008. The former Fed economist became a closely watched ECB policy maker, helping Cyprus punch above its weight.
At home, his Frankfurt-honed views on central bank independence led to an increasingly difficult relationship with President Demetris Christofias. In 2008, Orphanides refused to sell the central bank’s gold reserves and transfer the profit to the government. He also angered Christofias with repeated criticism of budget policy.
A year ago, Christofias accused Orphanides of not doing enough to prevent Cypriot banks from investing in Greek government bonds. The two largest Cypriot lenders, Bank of Cyprus and Cyprus Popular Bank, posted losses of 1.4 billion euros and 3.3 billion euros respectively for 2011, resulting mainly from writedowns of Greek debt.
Finance minister Vassos Shiarly, a former executive of Bank of Cyprus, said on April 23 that the government may need to support one of its lenders with as much as 1.5 billion euros.
Orphanides was among the demonstrators on Nicosia’s streets in July last year demanding the president’s resignation over his handling of an explosion at a naval base that killed 13 people and knocked out 50 percent of the island’s electricity production capacity.
Orphanides also urged Christofias to take additional and tougher steps to support the economy in a letter dated July 18.
“Orphanides’s departure is a loss but I am confident that the new governor will follow in his footsteps,” said Spyros Episkopou, chief executive officer of the Nicosia-based Epicentral Consultancy Ltd and formerly general manager of the Nicosia-based USB Bank Plc. (USB) He will have to convince “markets and investors as to the continuity with regards to the protection of the reputation of the Cypriot banking system,” he said.