VZCZCXYZ0000
RR RUEHWEB

DE RUEHNC #0721/01 2431102
ZNR UUUUU ZZH
R 311102Z AUG 07
FM AMEMBASSY NICOSIA
TO RUEHC/SECSTATE WASHDC 8129
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHBS/USEU BRUSSELS
RUEHTH/AMEMBASSY ATHENS 3917
RUEHRL/AMEMBASSY BERLIN 0727
RUEHAK/AMEMBASSY ANKARA 5024
RUEHFT/AMCONSUL FRANKFURT 8230

UNCLAS NICOSIA 000721 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV CY
SUBJECT: CYPRUS: CENTRAL BANK GOVERNOR TAKES NEW JOB IN HIS STRIDE 
 
 
REF: NICOSIA 350 
 
(U) This cable is sensitive but unclassified.  Please protect 
accordingly. 
 
¶1. (SBU) Summary: The recently appointed Governor of the Central 
Bank of Cyprus, Athanasios Orphanides, assured us that global 
financial problems arising from the "sub-prime" sector shake-out is 
a non-issue for Cyprus. Problems he identified for Cyprus are 
locally sourced (an overheated property market and bank over-lending 
to the sector; lack of a centralized credit bureau and lack of 
proper financial supervision in the "TRNC" causing the island's 
overall reputation to suffer). He remains confident that, despite 
these issues, the financial sector here is sound and that the 
introduction of the Euro on January 1 will go smoothly. End Summary. 
 
 
¶2. (U) On August 30, Econ Officer paid a courtesy call on Athanasios 
Orphanides, the recently-appointed (May 3, 2007) Governor of the 
Central Bank of Cyprus.  Orphanides, as noted Reftel, is 
MIT-educated, and a former U.S. Federal Reserve Senior Adviser. 
 
No Sub-Prime Problems Here 
-------------------------- 
 
¶3. (SBU) Orphanides, like our other local interlocutors in the 
financial services sector, reassured us that Cyprus was not exposed 
to the current sub-prime loans syndrome plaguing global markets. 
"Cypriot banks," he noted with a grin, "are conservative and 
well-regulated."  He also commented that Cypriot banks lack the 
"sophistication" to deal with "inherently riskier" products, such as 
Collateralized Debt Obligations (CDOs) and Structured Investment 
Vehicles (SIVs).  On the positive side, he believes that the current 
problems have made the world's global financial community more 
properly assess and price risk.  Similarly, European banks were less 
exposed to this problem due to their more conservative practices; 
where it did occur, this risk was localized - he made a pointed 
reference to the fact that it was not German commercial banks which 
have had problems but those controlled by government entities.  He 
also addressed the "moral risk" issue of bailing out failed banks. 
He noted that the ECB had injected liquidity into the system, and 
described this as an acceptable way of dealing with the problem, as 
opposed to helping troubled banks individually. 
 
Need for a Credit Bureau 
------------------------ 
 
¶4. (SBU) The Governor addressed the issue of credit reference 
services locally.  Cyprus does not have a widespread culture of 
using credit reference services (i.e., credit bureaus.)  Credit 
reports on companies as well as individuals are available from a 
handful of financial services companies for a fee, but their 
operation is not institutionalized, and their client base remains 
rather limited.  The Association of Cyprus Commercial Banks (ACC) 
has tried, so far without any success, to get local banks and 
cooperatives to set up a joint credit reference bureau.  Orphanides, 
whose patience seemed to be running thin on this issue, commented 
"We will give the ACC a little more time.  If the ACC cannot pull 
this off, then we will have to do it for them." 
 
Property Sector Too Hot 
----------------------- 
 
¶5. (SBU) Orphanides also commented on the Central Bank's recent 
decision (August 17) to increase the down-payment requirement for 
housing loans from 30 percent to 40 percent for holiday homes and 
second homes and to insist that the banks adhere to the existing 
guideline of requiring a 20 percent down-payment for a first 
residence.  He noted that this decision was a prudential supervisory 
measure, designed to cool down Cyprus' apparently overheating 
housing loan market.  In the first five months of 2007, housing 
loans had increased 33.3 percent from the corresponding period in 
2006, reaching CP 2.5 billion.  Housing prices have also been 
booming in recent years, creating fears, among many, of a housing 
bubble. Although local banks hold all their loans in their own 
portfolio (there is no securitization of bank loans here) the 
Governor is confident that Cypriot banks will not face problems from 
the potential real estate bubble because they concentrate on 
straight housing loans, without the "exotic flavors" available in 
the U.S., thereby maintaining a low risk exposure to interest rate 
and value fluctuations with significant collateral.  Nevertheless, 
the Central Bank wanted to let some of the air our of the overheated 
property sector and encourage banks to better diversify their loan 
portfolios away from real estate. 
 
Euro Transition - No Problem 
---------------------------- 
 
¶6. (SBU) Regarding the Euro, Orphanides seemed quite complacent that 
it would be adopted without a hitch on January 1, 2008.  He noted 
that the ("largely psychological") disadvantage of Cyprus losing 
flexibility over determining its own monetary policy flexibility was 
more than counterbalanced by the benefits of adopting the Euro. 
Among these he listed the fact that Cyprus would become one of the 
players in determining the course of the Euro instead of the 
existing predicament of Cyprus of simply being at the mercy of the 
Euro.  Decreased transaction costs and increased trade and services 
flows complete the picture of optimism that he painted. 
 
How Do You Solve a Problem Like Supervision? 
-------------------------------------------- 
 
¶7. (SBU) He noted that Cyprus was following closely the global 
debate on improving financial services supervision.  He said 
creating a single regulatory authority for all financial services, 
as in the case of the United Kingdom with the Financial Services 
Authority (FSA), was not necessarily the best model for all 
countries.  Such an arrangement, he noted, might even pose conflict 
of interest issues for the single regulator, due to the different 
needs of the different financial services sectors.  He noted that to 
date, the UK had not yet had the chance to test the hypothesis of 
how well such a regulatory model really works when a crisis hits and 
therefore remains unproven.  On the other hand, he noted, the U.S. 
offered an alternative model of regulation, with its own strengths 
and weaknesses. 
 
¶8. (U) Orphanides did not address specific weaknesses of Cyprus' 
current financial services supervisory model directly, although this 
is what he was alluding to.  Cyprus currently has five supervisory 
bodies to supervise the different branches of its prospering 
financial services sectors: (a) the Central Bank of Cyprus oversees 
commercial banks, both foreign-owned and domestic; (b) the 
Cooperative Central Bank supervises cooperative credit societies, 
although it does report to the Central Bank of Cyprus for deposits; 
(c) the Cyprus Securities and Exchange Commission (SEC) supervises 
stock trading firms; (d) the Superintendent for Insurance Control 
supervises insurance companies; and (e) a new authority has been set 
up recently to oversee employee provident funds.  This fragmentation 
of supervisory responsibility, although by no means unique to 
Cyprus, poses its own challenges, feeding the debate of its pros and 
cons, both in Cyprus and abroad. 
 
Money Is Dirtier in the North 
----------------------------- 
 
¶9. (SBU) On money laundering, Orphanides noted that Cyprus was 
probably at the top of the list of countries doing everything in 
their power to stem the problem.  He also commented that it was high 
time the international community addressed the money laundering 
problems in the north of Cyprus.  He said that it was unfair for 
Cyprus' image abroad to suffer from wrong-doings in the area of 
Cyprus outside the control of the government.  "Turkey should be 
held accountable for these problems," he stressed, "not the GOC." 
The Governor noted that "legally we have the obligation to supervise 
banks in the occupied area, but we can't fulfill this function for 
well-known reasons." He therefore requested Embassy assistance to 
learn more about USAID programs directed toward the financial sector 
in the north of the island. 
 
¶10. (SBU) On September 24-25, the EU led by the UK is sponsoring a 
discussion in the north on anti-money laundering practices.  The 
Central Bank has already offered to participate in this discussion 
but, according to Central bank officials, the Turkish Cypriots have 
refused to allow them to participate.  Orphanides noted that the 
Republic of Cyprus naturally cared about what happened in its own 
territory and that it was unfortunate that representatives from all 
other EU nations would participate, without the ROC. 
 
¶11. (SBU) Comment: Orphanides started off the meeting by proudly 
displaying his farewell present from the Fed: a framed set of 
one-dollar bills signed by all his former colleagues, including Fed 
Governor Bernanke.  Orphanides is clearly proud of his Fed 
experience and appeared very confident and relaxed in his new role, 
speaking with authority and conviction.  He clearly enjoyed talking 
about global financial matters even while stating that Cyprus is 
largely insulated from much of the current problem due to the local 
system's basic conservatism. 
 
¶12. (SBU) Comment continued:  The Governor clearly wants to find 
ways to help improve oversight and regulation in the north of Cyprus 
and therefore seems supportive of USAID's efforts in this regard. 
Such support from someone who has already gained considerable 
respect and support in the GOC will be helpful to US and EU efforts 
to ensure GOC support (or at least avoid GOC opposition to) 
ameliorate money laundering issues in the "TRNC." 
 
SCHLICHER