The decision by European leaders in December to reverse their doctrine on private sector involvement in shouldering potential bond losses has reduced credit risk, Central Bank of Cyprus governor Athanasios Orphanides said.

“The change in the PSI approach is one important reason that we at last have a reversal and some improvement following the December summit in how markets view us,” Orphanides, who is also member of the European Central Bank’s governing council, said in Nicosia today. “We have a considerable improvement, if you compare with our situation in November and where we are now with respect of risk.”

“We have not solved the problem yet because the risk is still higher compared to what we had two years ago,” he said.

He added that the reason for the higher risk, reflected in higher borrowing costs in the euro area, is that European leaders only partially reversed their “catastrophic” Oct. 26 decision as it exempted a 50 percent haircut on Greek debt.

To contact the reporter on this story: Stelios Orphanides in Nicosia at

sorphanides@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net