ECB’s Herodotou: Premature Withdrawal of Policy Support Should Be Avoided

9 May, 2021

By David Barwick – FRANKFURT (Econostream) – A premature withdrawal of policy support measures should be avoided, although prolonging them unnecessarily could also be harmful, European Central Bank Governing Council member Constantinos Herodotou said on Sunday.

In an interview with Cypriot medium “F”, Herodotou, who heads the Central Bank of Cyprus (CBC), said that various support measures had greatly cushioned the economic impact of the pandemic in Cyprus.

‘In particular, the fiscal measures taken by the state, the CBC measures … as well as the continued easing of monetary policy by the ECB … with purchases of Cypriot government bonds helped significantly in reducing the negative effects of the pandemic and prevented the significant rise of corporate bankruptcies’, he was quoted as saying.

‘Due to the continuing uncertainty regarding the course of the pandemic, the premature and complete withdrawal of support measures should be avoided’, he said, as the effect of such withdrawal would be to ‘cause further problems in the private sector, increase unemployment and reduce the income of businesses and households.’

‘However, if the support measures are extended unnecessarily for a long time, this could create distortions in the economic activity and endanger the viability of the public finances, with possible negative effects on the investment level of the Cypriot bonds’, he added. ‘We need, therefore, the right balance, targeting and gradual withdrawal of measures.’

According to Herodotou, ‘[i]t is generally accepted that the vaccination program in Europe has not yet progressed to the level expected by the Member States.’

‘At the same time, at international level, it is also important to coordinate to reduce the delays in vaccination programs in developing countries’, he said. ‘Otherwise, there will be a constant risk of introducing new and possibly more aggressive mutations of the virus from developing to developed countries, including our own. This can have further negative consequences.’

Herodotou voiced support for the creation of a so-called bad bank to mitigate the problem of non-performing loans in the country’s banking system.