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International Monetary Fund. Monetary and Capital Markets Department
In tandem with Eurozone financial market developments and the prevalence of negative interest rates in 2020, Cypriot banks passed through the costs of their liquidity to their customers, reducing the attractiveness of placing PDMO cash surpluses in domestic bank deposits. Suitable investment alternatives to central bank deposits for the PDMO’s liquidity buffer are scarce, given negative yields on other Eurozone sovereign and agency issues. This situation is shared by the PDMO with almost all of its Eurozone peers. While this is likely to persist in the short term, it should not preclude establishing a framework governing the PDMO’s investment policy or a suitable set of guidelines.
Ms. Marina Moretti, Mr. Marc C Dobler, and Mr. Alvaro Piris Chavarri
This paper updates the IMF’s work on general principles, strategies, and techniques from an operational perspective in preparing for and managing systemic banking crises in light of the experiences and challenges faced during and since the global financial crisis. It summarizes IMF advice concerning these areas from staff of the IMF Monetary and Capital Markets Department (MCM), drawing on Executive Board Papers, IMF staff publications, and country documents (including program documents and technical assistance reports). Unless stated otherwise, the guidance is generally applicable across the IMF membership.
International Monetary Fund. European Dept.
This Selected Issues paper assesses Cyprus’s export competitiveness and understands factors that could explain export developments, particularly in the services sector. Although Cyprus has been able to leverage its strategic location to diversity its markets for goods exports, as a small island economy, opportunities for diversifying its products mix is more limited. Services exports have performed better in the post-crisis period buoyed by the recovery in Europe and the impact of technological advances on global Information and Communication Technologies-enabled trade. Policies to support greater market diversification, enhance competition and efficiency and strengthen technological adoption would help exports growth. Studies have established the relationship between price and cost competitiveness with trade performance. Cyprus has performed reasonably well with strong service exports over the past few years, aided by improvements in cost competitiveness and a recovery in the European export markets. Policymakers should exploit opportunities brought by the digital transformation while addressing the accompanied risks.
International Monetary Fund. European Dept.
This 2019 Article IV Consultation with Cyprus discusses that following a period of very rapid growth in the aftermath of the economic crisis, growth is gradually settling in at a more sustainable but still relatively robust pace despite the external slowdown. Output is projected to rise by around 3 percent in 2019–20, supported by construction and services sectors. Good progress has been made in addressing domestic and external stability risks arising from legacies of the financial crisis. Sales of nonperforming loans (NPLs), amendments to the foreclosure and insolvency framework and resolution of a large systemic bank have helped strengthen bank balance sheets. Reversal of reforms to the foreclosure framework would hinder ongoing NPL resolution efforts and create risks for financial stability. Realization of contingent liabilities from the still weak banking sector or increased fiscal spending pressures could undermine investor confidence, raising interest costs and depressing growth. Cyprus needs to build on recent gains by advancing reforms to secure macroeconomic stability, enhance efficiency and strengthen productivity and growth potential.
Mr. Selim A Elekdag, Sheheryar Malik, and Ms. Srobona Mitra
This paper explores the determinants of profitability across large euro area banks using a novel approach based on conditional profitability distributions. Real GDP growth and the NPL ratio are shown to be the most reliable determinants of bank profitability. However, the estimated conditional distributions reveal that, while higher growth would raise profits on average, a large swath of banks would most likely continue to struggle even amid a strong economic recovery. Therefore, for some banks, a determined reduction in NPLs combined with cost efficiency improvements and customized changes to their business models appears to be the most promising strategy for durably raising profitability.
Ms. Deniz O Igan, Hala Moussawi, Alexander F. Tieman, Ms. Aleksandra Zdzienicka, Mr. Giovanni Dell'Ariccia, and Mr. Paolo Mauro
We track direct public interventions and public holdings in 1,114 financial institutions over the period 2007–17 in 37 countries based on publicly available information. We use aggregate official data to validate this new dataset and estimate the fiscal impact of interventions, including the value of asset holdings remaining in state hands at end-2017. Direct public support to financial institutions amounted to $1.6 trillion ($3.5 trillion including guarantees), with larger amounts allocated to lower capitalized and less profitable banks. As of end-2017, only a few countries had fully divested the initial support they provided during the crisis. Public holdings were divested faster in better capitalized, more profitable, and more liquid banks, and in countries where the economy recovered faster. In countries where the government stake remained high relative to the initial intervention, private investment and credit growth were slower, financial access, depth, efficiency, and competition were worse, and financial stability improved less.