VZCZCXRO8694 
OO RUEHAG RUEHROV RUEHSR 
DE RUEHNC #0180/01 0721150 
ZNY CCCCC ZZH 
O 131150Z MAR 09 
FM AMEMBASSY NICOSIA 
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9704 
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY 
RUEHAK/AMEMBASSY ANKARA PRIORITY 5414 
RUEHKV/AMEMBASSY KYIV PRIORITY 0050 
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 NICOSIA 000180 
 
SIPDIS 
 
TREASURY FOR DAS ERIC MEYER 
STATE FOR EUR DAS GARBER 
 
E.O. 12958: DECL: 03/13/2019 
TAGS: ECOIN ECON EFIN EUN PREL CY
SUBJECT: CYPRUS: FINANCIAL CRISIS IN EASTERN EUROPE 
 
REF: A. STATE 23758 
¶B. MARCH 3 EUR TELECONFERENCE 
¶C. 08 NICOSIA 932 
¶D. NICOSIA 172 
 
Classified By: AMB F URBANCIC FOR REASONS 1.5 B AND D 
 
¶1. (C) Summary: The Governor of Cyprus' Central Bank is 
fairly confident that Eurozone nations in eastern and central 
Europe will be provided with sufficient assistance from the 
EU and ECB to avoid systemic risk. Non-Eurozone member states 
he believes will not be allowed to fail, but he is less 
confident about how that will be accomplished and he has no 
insight into how the GOC intends to respond to their needs. 
Other nations in the region will have to depend on the IMF 
and pose the biggest threat to the markets. These views were 
largely echoed by a senior offical in the President's office, 
who questioned the EU's overall capacity for taking 
coordinated action. End Summary. 
 
"We Already Have Quantitative Easing" 
------------------------------------- 
 
¶2. (C) Per ref A, econoff met with Central Bank of Cyprus 
Governor, Athanasios Orphanides, on March 9 to discuss what 
the EU and its institutions can do to mitigate the growing 
financial crisis in Central and Eastern Europe. Orphanides 
stressed that members of the Eurozone "will be rescued" if 
their difficulties continue to grow. This will be done 
primarily as part of the overall stimulative measures being 
taken by the ECB. He noted that the ECB is already 
undertaking quantitative easing, although not calling it by 
that name, because it is making unlimited funds available for 
euro banks in return for "the extensive collateral these 
banks possess." Orphanides argued that the most important 
statement made by ECB President Trichet after the Bank's 
March 5 meeting was that "non-standard measures would 
continue as long as needed and beyond the end of the year." 
This, combined with Trichet's promise that he would not 
exclude any additional non-standard measure, is indicative, 
claims Orphanides, that ECB collateral purchases, which had 
already been extended from three to six month maturities, 
will be extended as long as necessary and provide "unlimited 
funds at fixed rates to any bank that needs liquidity" even 
though some "haircuts" (reduction in principal amount) may be 
involved. 
 
¶3. (C) Orphanides believes that the biggest problem in the 
eastern/central Eurozone is the dominance of non-local banks 
which have been reducing their lending in response to a need 
for them to focus on their home market problems. Remaining 
local banks have balance sheets too small to sufficiently 
restimulate their economies. The Governor believes that, one 
way or another, the EU and the ECB will find ways to funnel 
sufficient Euros into Eurozone economies to ensure that 
insufficient liquidity is not a barrier to monetary stimulus. 
 
"That's a European Commission Problem" 
-------------------------------------- 
 
¶4. (C) In regard to non-Eurozone EU members, Orphanides 
proclaimed, "politically, we can't allow any EU member to 
fail." That said, he is opposed to fast-tracking these 
nations for membership in the Eurozone noting that "the ECB 
can't overstep its political powers; we are not allowed to 
take financial risk, it's not part of the Bank's mandate to 
take losses-what to do about non-Eurozone members is really a 
decision for the EC." However, he argued that even the 
poorest of these countries is rich in some assets and the 
goal should be to "monetize these resources." Specifically, 
he said that an exchange of assets, such as claims on 
government land (as collateral) in return for loans would be 
a means to provide liquidity to some of these states. 
 
¶5. (C) Orphanides believes the biggest risk of system 
collapse would be in non-EU states in the region, 
specifically mentioning Ukraine and Turkey, because the EU 
has no political mandate (and likely no political will) to 
provide sufficient help. He argued that the best thing the US 
can do to help is to provide additional funds to the IMF for 
this purpose and then press the Europeans to follow suit. 
When asked if his government will press for this approach, 
Orphanides replied "you'll have to ask them, they don't seek 
my advice on these matters." (see ref C regarding the 
strained relations between the Governor and the Finance 
Minister). Orphanides was critical of the GOC's stimulus 
package because he is highly skeptical of the government's 
ability to speed up spending; "they have yet to demonstrate 
they can or know how to do it. And there is no Plan B for 
them." 
 
¶6. (C) The Ambassador delivered ref A points to Leonidas 
Pantelides, the diplomatic coordinator in the President's 
Office, who acknolwedged the need to help all EU members 
although he did not express any opinion on what should be 
done. He lamented that "the only thing the EU has 
accomplished is economic and monetary union, there is no 
coordination on anything else, and now even this is under 
threat." Panteldies noted that the Hungarian Ambassador had 
previously called on him to explain their situation and the 
risks of rising economic nationalism within the EU as 
evidenced by bank bailout funds being restricted to use 
within national borders; "European banks made money in 
Hungary for years, and now they are being told not to use any 
of that money in Hungary" Pantelides said. While agreeing 
with our points, Pantelides gave no assurance that Cyprus 
would strenuously argue for EU action to help its eastern 
members. He also said "we can do nothing for non-member 
states in trouble, such as Ukraine." 
 
Cyprus OK 
--------- 
 
¶7. (C) With very limited exposure to eastern European and 
Russian risk (less than 5 percent of total assets), 
Orphanides argued that the Cypriot banking system remains 
sound. Local deposits continue to grow and foreign deposits 
are stable. Exposure to the Greek market, 30-40 percent of 
total assets, could be a problem, but the banks have seen no 
increase in problem loans in their Greek operations. The real 
risk is the continuation of the global downturn; "we can only 
insulate ourselves for so long." To this end, he urged the US 
to provide more stimulus and certainty to the markets; "why 
not double the mortgage interest deduction to encourage 
renewed home buying? Why not completely nationalize Fannie 
Mae and Freddie Mac and end any uncertainty regarding those 
institutions?" He finally noted his support for the De 
Larosiere report ("the best we could do and still get UK 
support") and urged the US to adopt similar measures as a way 
to achieve greater global regulatory convergence and 
oversight. 
 
¶8. (C) Comment: Orphanides feels he has managed to influence 
outcomes at the ECB despite "being seen as the American in 
the room" (due to his 19 years at the US Fed). He will 
continue to battle the concern of some ECB members against 
zero interest rates ("there is no magic about this, the 
question is what are real interest rates.") and praised 
Fed-ECB cooperation "after a shaky time last fall." 
Orphanides is a pure technocrat, happy to fight for any idea 
that will achieve the goals, regardless of where they come 
from. Similarly, he is unafraid to criticize any idea, no 
matter how powerful its proponent. 
 
 
Urbancic