Following the Eurogroup’s decisions taken on March 25, 2013, Cyprus will receive assistance of up to €10 billion over the next three years. Repayment of the loan will begin in ten years time and have a maximum maturity of 20 years and an average of 15 years while the interest paid will be calculated based on the funding costs of the ESM, likely to be between 2 and 3 per cent. 

The ESM is expected to provide approximately €9 billion, subject to approval by its Board of Directors, and the International Monetary Fund (IMF) is to contribute around €1 billion, subject to approval by its Executive Board. “By providing loans of up to €9 billion the euro area member states are showing solidarity with Cyprus,” Jeroen Dijsselbloem, Chairman of the ESM’s Board of Governors and Eurogroup President said. “The implementation of the conditions attached to the assistance should ensure that Cyprus can build its economy on a sustainable basis,” he said. 

Klaus Regling, the ESM’s Managing Director, said: “This is the first fully fledged macro-economic adjustment programme financed by the ESM.” So far the ESM has financed the programme for financial sector reform in Spain to the tune of €41 billion. “Even after this second assistance programme the ESM will be able to fully play its role as the euro area’s effective firewall as it will still have about 90 per cent of its total lending capacity of €500 billion,” he added. 

The ESM was set up last October to preserve the financial stability of Europe’s single currency by providing direct financial assistance to euro area Member States in difficulty. It was preceded by the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). The EFSF and EFSM continue to handle money disbursements and programme monitoring of previously approved bailout loans to Ireland, Portugal and Greece. Greece alone has secured around €200 billion in bailout funds so far from the two previous instruments. 

Cyprus is not only the first fully fledged macro-economic bailout financed by the ESM, it is also the first country forced to contribute to its rescue package with a “bail-in” of over €10 billion by uninsured depositors of the island’s two biggest banks. A further estimated €3 billion will come from privatisations, state gold sale and fiscal adjustments. Laiki Bank and Bank of Cyprus (BOC) were the worst hit by last year’s writedown of Greek sovereign debt, suffering €4.5 billion losses, equivalent to around 25 per cent of Cyprus’ GDP. 

The initial Eurogroup decision had foreseen a ‘bail-in’ of depositors in all banks in Cyprus, big and small. This was reversed after parliament rejected the proposal and the Eurogroup decided on March 25 to wind down Laiki and recapitalise BOC while lumping the latter with Laiki’s over €9 billion debt to the European Central Bank. 

While theESM’s mandate includes providing loans to eurozone countries in financial difficulties or to finance the recapitalisations of banks, in Cyprus’ case, no portion of the €10 billion can be used to recapitalise the Bank of Cyprus or Laiki whose losses are considered too big to be covered by the EU. Instead, €3.4 billion of the funds will be used to cover Cyprus’ fiscal needs, €4.1 billion to redeem its medium and long-term debt, and €2.5 billion for the recapitalisation of banks apart from Bank of Cyprus and Laiki. 

Despite containing buffers for possible upward adjustments, the above figures regarding the state’s fiscal needs and banks’ recapitalisation needs are merely estimates. The true figures will depend to a large extent on how many depositors try to take their money out of Cypriot banks once capital controls are lifted and the impact of the crisis on state revenue and expenditure.  

The first disbursement of ESM financial assistance to Cyprus, around €2 billion, is expected in mid-May 2013, to pay maturing government debt while a further €1 billion will come before the end of June. Each tranche will be disbursed roughly every quarter after that. The ESM can tweak the size of each tranche disbursed based on the current needs of Cyprus at each stage and its adherence to pledged reforms. 

The country will be subject to quarterly reviews of its needs and implementation of an extensive programme of policy reforms including restoring the soundness of the Cypriot banking sector, continuing the process of fiscal consolidation, and implementing structural reforms to foster competitiveness and sustainable growth. Cyprus is expected to receive around half of the full bailout money within 2013. The aim is for Cyprus to return to international markets for loans after the three-year programme ends in 2016. It remains to be seen whether Cyprus will go cap in hand in three years time, seeking further bailout funds and whether the ESM will consider extending a hand.

Source: Cyprus Mail