ECB’s Herodotou: Economic Risks to the Downside, Mustn’t Withdraw Support Early

19 May 2021

By David Barwick – FRANKFURT (Econostream) – The risks to the economic recovery are to the downside and a premature withdrawal of policy support measures should be avoided, European Central Bank Governing Council member Constantinos Herodotou said on Wednesday.

In the foreword to the 2020 annual report of the Central Bank of Cyprus (CBC), which he heads, Herodotou said that following a renewed surge of the pandemic at the end of 2020, ‘hopes for recovery have shifted later in 2021 and have been boosted by the availability and distribution of vaccines.’

‘However, the downward risks to economic forecasts continue to prevail, due to delays in vaccinations and the increase in Covid-19 cases in many euro area countries’, he said.

Herodotou spoke glowingly of the ECB’s policies, with the pandemic emergency purchase programme having ‘contributed decisively to the reduction of the yields of Cypriot government bonds and, in turn, to the cost of borrowing’, while historically low interest rates ‘make a significant contribution to maintaining low borrowing costs in Cyprus’.

‘It should also be noted that through the explicit assurance to maintain supportive monetary policy for as long as needed, the ECB is decisively strengthening the efforts to boost economic activity’, he added.

Herodotou warned of high levels of public and private debt as well as of non-performing exposures, ‘both in relation to Cyprus macroeconomic fundamentals and in relation to the euro area average.’ In this context, he urged ‘extremely careful and targeted planning to deal with the economic consequences of the pandemic.’

Support measures should be left in place until the recovery is sustainable, but at the same time should not be prolonged unnecessarily, as this could cause economic distortions and foment zombification, while also threatening fiscal sustainability, ‘with significant negative implications in relation to the determination of the investment grade of Cypriot bonds by the rating agencies, with everything that this entails for the country's borrowing costs’, he said.