Cyprus is the fourth euro area country which agreed a fully-fledged bailout with the European Commission, the European Central Bank and the International Monetary Fund after Greece, Ireland and Portugal and the third to complete it.

Cyprus’ government decided in favour of a “clean exit” from its adjustment programme i.e. without asking for a credit line or bridge loan. The Cypriot government was forced to resort to a bailout after losing market access in May 2011 and a total of €4.5bn loss suffered by its major lenders in Greece’s debt restructuring that year, which wiped out a significant portion of their capital.

While Cyprus’ adjustment programme provided for the implementation of fiscal consolidation measures and structural reforms, it differentiated itself from those of other bailed out countries because the way Cypriot banks were recapitalised. Bank of Cyprus, largest Cypriot lender, had to resort to converting almost half of uninsured deposits to equity while second largest lender Laiki, as Cyprus Popular Bank was also known, went bankrupt and as a result depositors lost all their deposits in excess of €100,000.

While the government was successful in consolidating public finances, restoring market access, reforming the social security system, reforming the welfare system and making possible the participation in the European banking union, some of the reforms were implemented either with delay or significantly watered down.

This was mainly a reform fatigue exacerbated by DIKO’s withdrawal from the government coalition citing disagreements over the handling of the Cyprus Problem. As a result of opposition to the government’s privatisation programme, the Cypriot parliament has not passed the law that would create CyTA Ltd, a company that would take over assets and operations of the Cyprus Telecommunications Authority, the state-owned telecom. As a result, Cyprus will not meet one of the required conditions for the disbursement of the last tranche of bailout funds.

As a result, the new insolvency and foreclosure legislation as well as that that allows banks to sell loans to third parties, have not been effective enough, so far, to considerably reduce the stock of non-performing loans in the banking system which continue to make up almost half of the overall loan portfolio.

Following the completion of the programme, the European Commission will review twice a year Cyprus’s budget and reform policies.

According to the Public Debt Management Office’s website, Cyprus borrowed slightly more than €7.2bn from the European Stability Mechanism and International Monetary Fund. The IMF’s contribution reached following the disbursement of the tenth tranche almost €950m. The total amount earmarked for Cyprus’ bailout was €10bn.

Source: Cyprus Mail