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Cyprus lost 10.5 per cent of GDP through government intervention in banking sector

The European Central Bank has had many inquiries from British-based banks wanting to come under its watch

Government intervention in the banking sector in Cyprus resulted in irreversible losses, amounting to 10.5 per cent of the island’s GDP, a European Central Bank report says, describing the Cypriot case as the “worst case” in terms of government support recovery.

According to an ECB report titled “The fiscal impact of financial sector support during the crisis”, Cyprus suffered the third largest fiscal impact following Ireland and Greece.

“In the worst case, a limited recovery rate could indicate that the interventions led to major irreversible losses, as in the case of Cyprus, with a holding loss for the government on equity instruments amounting to 10.5 per cent of GDP owing to the restructuring of one of its largest banks,” ECB said.

In June 2012 Cyprus issued a €1.9 billion bond to cover the capital needs of the Cyprus Popular Bank (CPB, or Laiki), the island`s second largest lender, acquiring almost 100 per cent of its share capital. However following an agreement with the EU and the IMF in March 2013 on a €10 billion bailout, CPB entered a resolution process wiping out its share capital. CPB`s assets along with the government bond were transferred to the Bank of Cyprus (BoC). So far the state has repaid approximately €1.5 billion of the bond held by BoC.

According to the report, over the period 2008-14 the accumulated gross financial sector assistance in the euro area amounted to 8 per cent of euro area GDP, bloating the currency union`s debt by 27 percentage points between 2008 and the end of 2014.

The deficit impact was particularly strong in Ireland, where it led to a cumulated worsening of the budget balance of almost 25% of GDP. The budget balances of Greece, Cyprus and Slovenia were also substantially affected by the support measures, with a cumulated deficit impact of between 8 per cent and 13 per cent of GDP during 2008-14, the report added.

General government debt in the euro area increased by 4.8 per cent of GDP over the period from 2008 to 2014 owing to financial sector assistance, while financial sector support led to a substantial increase in government debt of around 20 per cent of GDP in Ireland, Greece, Cyprus and Slovenia.

 

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