Financial sector among most leveraged in EU.
CYPRUS' financial sector is among the most leveraged in the whole of the EU, a European Commission's report said yesterday.
The European Commission kicked off yesterday with the second annual cycle of the Macroeconomic Imbalance Procedure (MIP) 2013 with the publication of the Alert Mechanism Report (AMR).
The report calls for in-depth reviews of developments related to the accumulation and unwinding of macroeconomic imbalances in 14 EU Member States: Belgium, Bulgaria, Denmark, Spain, France, Italy, Cyprus, Hungary, Malta, the Netherlands, Slovenia, Finland, Sweden and the United Kingdom.
As regards Cyprus, it noted that in May 2012, the Commission concluded the island was experiencing very serious imbalances, in particular as regards developments related to the external position, public finances and the financial sector.
"In the updated scoreboard, several indicators are above their indicative thresholds, namely the current account deficit, net international investment position, export market shares, private sector credit flow, private sector debt and general government debt," the report says.
It adds that on the external side, the current account balance indicator remains above the negative threshold despite a recent strong decline in imports due to a compression of domestic demand.
"Looking forward, the losses in export market shares are in particular explained by the goods balance which has maintained its downward trend, while Cyprus continues to record surpluses in services trade", it noted.
According to the report, "overall, the current account deficit is forecasted to decrease in the years to come. Losses in price and cost competitiveness have eased recently, the public sector wage freezes contributed to wage moderation in the private sector and export-oriented sectors".
It also noted that "structural reforms to underpin sustained improvements in competitiveness have not materialised".
"In parallel, the negative net international investment position is fast-deteriorating which raises concerns about the sustainability of external position of the country. The net international investment position has deteriorated on the back of current account deficits, but also due to valuation losses on banks` assets abroad," it pointed out.
On the internal side, the report notes that "the highly leveraged private sector has continued to unwind its large outstanding debt".
"This is also indicated by the significant decrease of the private sector creditor flow indicator compared to the year before. The fact that the credit indicator remains above the threshold is primarily associated with the loan rescheduling process taking place, as the rescheduled loans are treated as new flows, rather than provision of new credit," it said.
"Also Cyprus' financial sector is among the most leveraged in the whole EU," it added.
As regards households, the report noted that "debt levels are matched by substantial assets, but these have been hit by a continuous decline in real and nominal house prices".
"The public debt is also above the Treaty-based threshold and is expected to increase sharply", it underlined.
Referring to unemployment, the report said it has risen sharply recently, and was expected to increase further, indicating structural challenges in addition to cyclical factors.
"Any further fallout from the exposure of the Cyprus banking sector to Greece and further deterioration of economic activity will aggravate the risks and make structural adjustment more difficult", it is noted.
The report says that "the situation is further exacerbated by negative feedback loops between developments in the housing and financial sectors and government finances".
Copyright Cyprus Mail 2012
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