NICOSIA - Outgoing Central Bank Governor Athanasios Orphanides said Wednesday that he was optimistic that there would be a solution for the Cypriot economy suffering from private bank exposure to Greek debt and bonds, warning however if Cyprus fails to take the right action then the financial repercussions would be significant for the future of the country.

''If they continue to handle the issue in the right way and in close cooperation with the Governor of the Central Bank, the Minister of Finance, I am optimistic that they will find a solution”, he said presenting the annual report of the CB for 2011.

Ophanides said that the CB was working 24 hours a day, seven days a week in cooperation with former and current Minister of Finance to find a solution to the problems.

He added however that the situation is critical, and that he could not assure for the future developments.

Ophanides argued that if the haircut of Greek bonds was agreed at 50%, as it was the original decision, the Cypriot banks would have the funds to deal with the problem.

He added that the problem arose at the EU Summit on 26 October, where a haircut of 75-80% of Greek debt was agreed.

''In my view, and this view is also shared by many other central bankers and supervisory authorities, is that many mistakes were made in the way this haircut was decided and imposed on banks of the Eurozone,'' he said.

Saying that Cyprus is now facing unprecedented economic challenges, Orphanides pointed out that “the negative vicious circle created form the negative interaction between public finances and the banks must be broken”.

Analyzing the economic results of CB for 2011, Orphanides said the recovery process that started during the first half of 2011, was interrupted during the second half of the year mainly due to the destruction of the power station at Vassiliko on July 2011 and its consequences. He added that the international economic and financial developments, especially the Greek bond haircut, had a negative impact on Cyprus.

According to the presentation, Cypriot economy in 2011 recorded a marginal growth of 0.5% compared with 1.1% in 2010. Unemployment continued to show an alarming upward trend and by December of 2011, seasonally adjusted harmonized unemployment reached historically levels of 9.4% continuing to grow in the first months of 2012.

CB’s profit before transfer to reserves and provisions was 66.6 million euros. In 2011, the Bank increased its provision for general risks by 25 million euros, bringing the total forecast at 100 million euros, while increasing the Bank's capital by 30 million euros.

During the last five years, the capital of the CB increased by 250% (from 25.6 million euro to 90 million euro), and it reserves by 71% (from 34 million to 58 million).