Gold Magazine June - July 2013, Issue 27 | Page 91

I

t was necessary for Cyprus’s banking sector
to shrink, whether such a development was
imposed by the Troika or not, according to
Petr Zemcik, Director of Economic Research
at Moody’s Analytics London office. Zemcik,
who spoke to Gold during his recent visit to
Cyprus where he addressed the 3rd Nicosia
Economic Congress, does not see anything
bad in principle about Cyprus having a large
banking sector. However, he notes that the
island’s banks lacked the necessary knowledge
and expertise to channel the deposits into
productive sectors.
As a result of the Eurogroup’s decision on
Cyprus, the country’s banking sector was
downsized immediately and significantly to
350% of GDP from around 550%, which
domestic banking assets, including those in
the cooperative credit institutions, represented until recently.
As Zemcik sees it, “Cyprus has been running up big current account and fiscal deficits
for many years. That means that for a long
time it was spending money which was coming from outside the country through the
banking sector. If you consider the balance
sheet of the banking sector in Cyprus, the
deposits were very large. The question that
arises is how should those deposits have been
used? Some of them ended up in the property market, some ended up in Greece. The
Cyprus economy could not absorb these cash
inflows so they ended up as loans that turned
not to be that efficient. The banking sector
had to shrink.”
Why is Zemcik so adamant in this position? It is not a question of principle, he
insists: “I do not have a problem with Cyprus
having a banking sector business model.
Think about Luxembourg or Switzerland,
but having a large banking sector also means
developing expertise in what to do with the
money you attract. The money flows in and
you have to find a good way of using it, either

cyprus

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Cyprus should concentrate on