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South Cyprus bailout endorsed by Eurogroup

13 April 2013

European Commission Vice President and Commissioner responsible for Economic and Monetary Affairs and the Euro, Olli Rehn vowed to assist South Cyprus’ recovery as Eurogroup Ministers endorsed a 10 billion euro bailout for the South.

A statement on South Cyprus, released following a Eurogroup meeting in Dublin states that the European Stability Mechanism Board of Governors will approve the proposal for a financial assistance facility agreement by 24 April 2013, whereas the IMF is expected to approve a 1 billion euro assistance by early May.

South Cyprus applied for financial assistance after its two largest banks sought state aid following massive write downs of their Greek bond holdings amounting 4.5 billion euro.

The Cypriot authorities and the Troika of the European Commission the European Central Bank and the IMF agreed on a memorandum of understanding stipulating that the total bailout amounts to 23 billion euro , of which 9 billion will be covered by the ESM, 1 billion from the IMF, while 13 will be secured from Cyprus. Under the agreement, Laiki, the islands second largest lender will be wound down, whereas a percentage of up to 60% of the deposits in Bank of Cyprus, the island`s largest lender will be converted to shares.

“The Eurogroup is confident that determined action in line with the reform measures spelled out in the MoU will allow the Cypriot economy to return to a sustainable path based on sound public finances, balanced growth and financial stability, “ the statement says.

The Eurogroup furthermore considers that “that the necessary elements are now in place to launch the relevant national procedures required for the formal approval of the ESM financial assistance facility agreement for an amount of up to EUR 10 bn, subject to IMF’s contribution.”

However, a debt sustainability analysis prepared by the European Commission states that the Cypriot real GDP is expected to shrink by 12.5% in 2013 and 2014.

Welcoming the agreement Rehn said “we will try to reallocate structural funds so that we can use them as effectively as possible to support the kind of economic activities in Cyprus that will help the country to return to recovery … for growing and investment and employment.

On behalf of the Commission, I want to say again that we stand by the Cypriot people and we are committed to providing support and technical assistance to help Cyprus to get through the tough times and overcome the current difficulties,” he added.

Responding to question on the total amount of Cyprus`s bailout programme now estimated at 23 billion, of which 13 billion will be contributed by Cyprus, whereas the initial programme was estimated at 17.5 billion, “people have been comparing apples with pears and coming up with oranges.”

“The 17 billion euros is related to net financing needs … while the larger figure, 23…is a gross financing concept,” he was quoted as saying.

Asked on press reports that Cyprus may sell its gold reserves in a bid to secure additional resources, Eurogroup Chairman Jeroen Dijsselbloemm said this is an alternative considered by the Greek Cypriot authorities, adding the island’s Central Bank is the competent authority to decide on the issue.

A document titled “Assessment for the potential financing of Cyprus” prepared by the European Commission writes that Cyprus Central Bank could allocate future profits from gold sales estimated at 400 billion euro.

Government Spokesman Christos Stylianidis said Friday that although the European Commission has raised the financial needs of South Cyprus from 17.5 to 23.5 billion euro, this does not indicate any new burdens on depositors, or recapitalization of banks.

As he said, the European Commission’s estimations for 23.5 billion have already been considered and assessed in the final Memorandum and the loan agreement with the Troika.

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