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Orphanides faces ECB exit after Kazamias quits.

BY MICHELE KAMBAS Athanasios Orphanides' days at the European Central Bank appeared numbered on Friday after he lost his only ally in a hostile government that will decide by April 30 if he gets reappointed.

The resignation of Cyprus Finance Minister Kikis Kazamias for health reasons effectively eliminates the only known supporter of Orphanides in the Communist government. The government announced Kazamias's resignation on Friday, with a mini reshuffle announced on Monday. He is replaced by former Bank of Cyprus executive Vasos Shiarly.

Monday's cabinet reshuffle also saw the ouster of Trade and Energy Minister Praxoula Antoniadou Kyriacou just eight months after her appointment, and her replacement by Interior Minister Neoclis Sylikiotis. Taking his place is former Nicosia mayor Eleni Mavrou.

"It is well known Kazamias favoured Orphanides's re-appointment, and him not being in the cabinet lessens those chances," said economist Stelios Platis.

Orphanides, a member of the Governing Council of the ECB and head of the Central Bank of Cyprus since 2007, had close relations with Kazamias, who publicly defended him on several occasions over the island's exposure to Greek debt.

The government denied newspaper reports Kazamias quit in part because of a rift with President Demetris Christofias over the central bank appointment. Kazamias has been battling an infection since falling ill in late January and needs constant medical supervision.

Orphanides, a former senior adviser at the Federal Reserve, was appointed by the previous administration to head the central bank and his five-year terms ends on April 30.

If he is not reappointed he loses his seat at the ECB, where he advocated ultra-low interest rates at the height of the financial crisis in 2009 and was a key architect of a bond purchase programme credited with keeping a lid on the euro zone's debt troubles.

But in his native Cyprus relations rapidly nosedived with Christofias, elected for a five-year term in 2008, and the two men seldom meet.

Orphanides made few friends by refusing to sell gold reserves or rubber-stamp bank licenses, and he was vocal about the need for spending cuts and reforms in the tiny 17 bln euro economy. The reforms were eventually taken by Kazamias, appointed in August of last year.

GREEK EXPOSURE But the major blot on his copybook, according to official sources, is the perception that regulatory oversights led Cypriot banks to hoard Greek government bonds, saddling them with mammoth losses.

It is not an issue publicly discussed, but government-friendly media does the talking. "Orphanides' End", proclaimed the weekly Gnomi newspaper. Orphanides, it said, had responsibility for the exposure.

Two local lenders, the Bank of Cyprus and Marfin Popular, held 2 and 3 bln euros respectively of Greek sovereign paper, written down in the recent private sector debt swap deal that cut the value of Greek bonds by more than half.

Greek exposure is cited as a key factor in repeated ratings downgrades on Cyprus, and two of the world's three credit ratings agencies now class the island's sovereign debt as junk following action by Moody's last week.

Sources say Orphanides had sent letters to banks highlighting risks from exposure to high-yielding sovereign debt. As a member of the euro zone, it is unclear what further restrictions could have been adopted, though there is a suggestion it could have been done in official circulars.

One drawback, said an industry insider, was that however talented Orphanides was as an economist, he lacked the unofficial arm-twisting tactics which are a part of an old boys' network running through the Cypriot economic and political establishment.

Others disagree.

"If one provides evidence of how he could do that, without discriminating against another euro zone member I would say he has blame. Until that happens, and it hasn't happened, I am fully supportive (of Orphanides)," said Alexander Apostolides, an economics historian at European University Cyprus.

RUMOUR MILL There are plenty of rumours but as yet no clear indications as to who Orphanides's successor at the island's central bank - who would also inherit his ECB seat - might be.

Persistent rumours point to Panicos Demetriades, a professor of economics at the University of Leicester in the UK. Demetriades declined to comment.

Whoever takes over will have to supervise recapitalisation attempts by the banks. Marfin needs to find 1.35 bln euros in fresh capital by the end of June and says it plans to raise it either through existing shareholders or new ones. If it falls short, the state will step in.

"Personally I am very sceptical in personalising the contribution of anyone at the central bank or the ECB," said economist Platis. "I don't think the ECB, or the markets in this respect, will change their stand if Orphanides is not reappointed and Kazamias has resigned.

"What will matter is if the people replacing him are doing their job. We need strong technocrats with the ability to express clear views and convincing arguments." Should Orphanides not be reappointed, Platis said, a credible option would be Chris Pissarides, recipient of the Nobel Prize for Economics in 2010 for his work on unemployment.

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Publication:Financial Mirror (Cyprus)
Geographic Code:4EXCY
Date:Mar 21, 2012
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