NICOSIA The Cypriot banking sector is turning a new page, Central Bank of Cyprus (CBC) Governor Panicos Demetriades said on Thursday, as Cyprus began implementing the terms of a Memorandum of Understanding with the European Commission, the European Central Bank and the International Monetary Fund.

The Memorandum was agreed in principle in the context of Cyprus` application for financial assistance from the EU bailout mechanism.

Excluded from the international capital markets, Cyprus on June 25, 2012, requested financial assistance after its two largest banks sought state support to fulfill their capital requirements following a massive write-down of Greek sovereign bonds and loans granted to Greece. Cyprus acquired €1.8 billion shares of Cyprus Popular Bank amounting to 10% of the island`s €17.9 GDP, while Bank of Cyprus, the island`s largest lender, announced it will request state support worth of €500 million.

"I expect that 2013 will be full of challenges. Our biggest bet will be the successful implementation of the memorandum in a way that would secure the stability of our financial system and its broader contribution to sustainable growth," Demetriades said in a statement for the New Year.

Demetriades acknowledged that the fiscal measures included in the memorandum "are painful for all of us."

"However, despite the painful measures, the memorandum generally lays the foundation for the recovery of the Cypriot economy," he said, recalling that the memorandum inter alia includes significant measures for the consolidation, restructuring and recapitalisation of the financial sector, which "will lead to a healthier, more competitive and more resilient banking system, which could support healthy private initiative and sustainable growth."

Demetriades underlined that the reforms in the banking system are unprecedented, adding that reactions to changes such as the definition of the non-performing loans were expected.

Politicians and economists have criticized the CBC that it allowed the change in the definition of the non-performing loans which inflated the capital deeds of the Cypriot banks which in turn will increase the Cypriot public debt to non-sustainable levels.

"Maintaining stricter liquidity and capital adequacy requirements will increase investor confidence in the banking system, whose books reflect the real situation of bank in a better way," Demetriades said.

Demetriades was critical of his predecessor, Athanasios Orphanides, noting that the CBC`s main responsibility is to carry out an effective supervision of the banking sector, which includes the satisfactory staffing of the Banking Supervision Department and the Financial Stability Department.

"During the past five years our baking system`s assets increased by approximately 50%, but the staff at these two departments remained the same. Of course, it is not certain whether we would have avoided the crisis, had the CBC more executives in these departments. However, it would have been odd, if this were not helpful," he said.

Demetriades also accused the banks of "giving false impressions in the early stages of 2012" that they had the capability to secure capital from the private sector or to sell assets that would enable them to meet capital requirements by June 30, 2012.