Cyprus central bank sees shallower 2014 recession than forecast

NICOSIA Wed Jun 25, 2014 7:19am EDT

A man cycles pass the Central Bank of Cyprus on the island's capital Nicosia, April 18, 2013. Germany's lower house of parliament voted overwhelmingly on Thursday to grant Cyprus a 10 billion euro bailout that is designed to avert bankruptcy for the tiny Mediterranean island nation and keep it in the euro zone. REUTERS/Andreas Manolis (CYPRUS - Tags: BUSINESS) - RTXYR1F

A man cycles pass the Central Bank of Cyprus on the island's capital Nicosia, April 18, 2013. Germany's lower house of parliament voted overwhelmingly on Thursday to grant Cyprus a 10 billion euro bailout that is designed to avert bankruptcy for the tiny Mediterranean island nation and keep it in the euro zone.

Credit: Reuters/Andreas Manolis (CYPRUS - Tags: BUSINESS) - RTXYR1F

NICOSIA (Reuters) - Cyprus's economy could contract less this year than the 4.2 percent expected by the euro zone country's bailout lenders, its central bank governor said on Wednesday.

The European Union and International Monetary Fund, which will lend Cyprus 10 billion euros under a year-old rescue deal, revised the projected drop in output lower last month from an earlier estimate of 4.8 percent.

At a news conference, central bank governor Chrystalla Georghadji cited data showing an annual decline in first quarter output of 4.1 percent compared to 5 percent for the quarter before. "Based on that assessment, the troika's projection for a 4.2 percent decline in growth for the full year is rather pessimistic," she said.

"We would expect it to be around 4.0 percent."

Since its March 2013 rescue, under which the island nation was forced to shut down a loss-making bank and impose losses on depositors in another lender, Cyprus's economy has proved more resilient than many had expected.

Last week, it made the swiftest return to financial markets of any bailed-out country, selling a 750 million euro five-year bond yielding 4.8 percent.

Georghadji, who also represents Cyprus on the governing council of the European Central Bank, said the island would fully dismantle capital controls imposed at the time of the bailout when confidence in the banking sector was restored.

Domestic controls were fully dismantled in May, but controls still exist in transactions with the outside world.

Efforts to shore up the financial industry, wrecked by its exposure to Greek debt and by the rescue plan, were beginning to yield results, she told the news conference in Nicosia.

Georghadji later said commercial banks were wise to try to raise capital ahead of euro zone-wide stress tests later this year for which they should be "absolutely prepared". "A capital issue would be a prudent move for them to move towards the stress tests reinforced," she told journalists, adding that better buffers against future losses for commercial banks could also help hasten the removal of capital controls. Bank of Cyprus, which recapitalised last year by turning a percentage of deposits at the bank into equity, said on Tuesday its board would discuss capital issues and funding at a meeting on June 26.

(Editing by Catherine Evans)

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