NICOSIA - Former Central Bank Governor Athanasios Orphanides has told the committee probing Cyprus’ economic meltdown that the messy bailout has taken the island backwards by at least a generation.
He said he expected GDP and the unemployment rate will reach much worse levels than in the aftermath of the 1974 Turkish invasion.
Appearing before the investigative committee on Friday he said that he had warned the former government of an impending crisis in the economy.
He said that from 2009 on he had sent letters to former President Christofias warning him about the economy’s situation and recommending measures to reduce public spending, but had never received a response
Athanasios Orphanides, who ran Cyprus's central bank from 2007 to 2012, also said a decision to haircut Greek bonds - excessively damaging for Cyprus - was "terribly wrong".
Cyprus shut down one bank and imposed heavy losses on a second in return for a €10 billion bailout from international lenders in March. Both banks had invested heavily in Greek bonds, whose value fell under a deal by European leaders in 2011 to ease that country's debt load.
"The euro zone is in an existential crisis," Orphanides said.
"Markets are currently calm, but I will not hide from you that I am deeply concerned that after the German elections in September we might have a flare-up of the crisis in the euro zone," said Orphanides, who now teaches macro-economics at the MIT in the United States.
Orphanides, who also sat on the board of the European Central Bank during his Cyprus tenure, said authorities could not legally prevent Cypriot banks from buying bonds in another sovereign since it was a member of the euro zone.
"This is something which still concerns me," Orphanides said. "Even today, such (sovereign) bonds are considered zero risk, for regulatory reasons. I think that is madness, but that is the reality of the regulatory framework," he said.
Cyprus's two major banks of the time, the now wound-down Laiki and Bank of Cyprus, lost about €4.5 billion on Greek bonds - a sum equal to 25 percent of the island's GDP.
When the banks turned to the state it was unable to help, since it had itself been locked out of financial markets for at least a year, forcing it in turn to apply to the IMF and the EU.
Orphanides, who was a sharp critic of the Communist administration in power from 2008 until it lost general elections in February 2013, said his repeated appeals to the government of the time to shore up public finances were ignored.
Banking sector problems were exaggerated by the former administration to detract from its own mistakes, along with a delay in negotiating aid, he said.
The Christofias’ government, AKEL and the Central Bank of Cyprus “deliberately harmed” the banking system of Cyprus “to serve their political interests and minimise political cost” in view of the 2013 presidential elections, he added.
“Unfortunately the coordinate propaganda by the AKEL Government and the Central Bank harmed Cyprus and led foreign governments and decision makers to believe that they should rid Cyprus of ‘casino banks’”, he noted.
He added that Pimco, a company that carried out a due diligence report on the banks, inflated their capital needs by using a “more conservative” methodology, as it was described by the International Monetary Fund.
President Anastasiades is due to testify on Tuesday.