Exit from bailout, to re­pay prin­ci­pal on ESM loans in 2025-2031

Financial Mirror (Cyprus) - - FRONT PAGE -

Cyprus ex­ited from its three-year bailout res­cue pro­gramme at mid­night on Thurs­day, March 31, but it will still have to re­pay the prin­ci­pal on ESM loans from 2025 to 2031.

Cyprus used up only EUR 6.3 bln from the ESM, plus EUR 1 bln from the IMF, out of a EUR 10 bln en­ve­lope agreed with cred­i­tors in March 2013. That was due to pri­vate par­tic­i­pa­tion in bank re­cap­i­tal­i­sa­tion and early restora­tion of mar­ket ac­cess.

How­ever, it lost some EUR 500 mln in fi­nal fund­ing due to a de­lay in the pri­vati­sa­tion re­forms and a stag­na­tion in ef­forts to re­struc­ture the pub­lic health sec­tor and the telecom and power util­i­ties, Cyta and EAC.

Cyprus is al­ready tap­ping the bond mar­kets, since June 2014, when it is­sued 5year pa­per at a yield of 4.85%. The ESM noted that just one year ear­lier, in July 2013, the cor­re­spond­ing bond yield had been al­most 14%. The much lower in­ter­est rate in 2014 shows how quickly Cyprus re­gained the trust of in­vestors thanks to its re­forms. The 10-year yield reached 3.8% at the end of 2015.

In the course of the past three years Cyprus had to re­store the sta­bil­ity of the bank­ing sec­tor by thor­oughly re­struc­tur­ing and down­siz­ing fi­nan­cial in­sti­tu­tions, cut the ex­ces­sive gov­ern­ment deficit, in par­tic­u­lar by re­duc­ing cur­rent pri­mary ex­pen­di­ture and in­creas­ing the ef­fi­ciency of pub­lic spend­ing, and im­ple­ment struc­tural re­forms to sup­port com­pet­i­tive­ness and sus­tain­able and bal­anced growth.

Ac­cord­ing to EU data, growth has re­turned in 2015 (1.6%) af­ter three years of re­ces­sion and is ex­pected to con­tinue in 2016 (1.5%) and 2017 (2%), pub­lic deficit amounts 1% in 2015 from nearly 6% in 2012, the “over­sized fi­nan­cial sec­tor was sig­nif­i­cantly down­sized and re­struc­tured”, cap­i­tal con­trols were fully lifted in April 2015, un­em­ploy­ment is on the de­cline and state fi­nances se­cured a sound debt pro­file and a cash buf­fer of over EUR 1 bln, no longer re­quir­ing fi­nan­cial as­sis­tance.

The ESM stressed that it will con­tinue to work closely with Cypriot au­thor­i­ties to en­sure timely loan re­pay­ments, through the ESM’s Early Warn­ing Sys­tem, de­signed to de­tect re­pay­ment risks and al­low for cor­rec­tive ac­tions, while the au­thor­i­ties will have to sub­mit ad­just­ment re­ports twice a year. For that pur­pose, the ESM will re­ceive reg­u­lar re­port­ing and will join the Euro­pean Com­mis­sion twice a year for its post­pro­gramme sur­veil­lance mis­sions.

ESM at­tributes the Cyprus bailout to the rapid ex­pan­sion of the fi­nan­cial sec­tor and bank lend­ing, to nine times the coun­try’s GDP, com­pared to the cur­rent ra­tio of do­mes­tic bank as­sets of 3.5 times GDP (close to the EU av­er­age) the ex­ces­sive bud­get deficits and record high cur­rent ac­count deficits, re­flect­ing Cyprus’s fall­ing com­pet­i­tive­ness.

“The banks’ ex­po­sure to Greece and the de­te­ri­o­rat­ing loan qual­ity at home forced Cyprus’s largest banks to record sub­stan­tial cap­i­tal short­falls. Bank credit pol­icy, poor risk man­age­ment prac­tices, and in­suf­fi­cient su­per­vi­sion con­trib­uted to the prob­lems. As a re­sult, Cyprus lost mar­ket ac­cess and the Cypriot gov­ern­ment re­quested fi­nan­cial as­sis­tance in June 2012”, says ESM in a state­ment.

Mean­while, Pres­i­dent Ni­cos Anas­tasi­ades tweeted that Cyprus’ exit from the eco­nomic ad­just­ment pro­gramme marks a new day and new re­spon­si­bil­i­ties. Cyprus is the fourth euro area mem­ber state to exit its bailout fol­low­ing Ire­land, Spain and Por­tu­gal.

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