By Andria Kades and Gregoris Savva
Cyprus was praised all round on Monday as it prepared to exit its three year economic adjustment programme which was branded by troika officials as a success.
Finance Minister Harris Georgiades, tweeting during a Eurogroup meeting with his European counterparts posted “Cyprus is out of the memorandum. We will continue our efforts with seriousness, avoiding populism and the mistakes of the past.”
“We owe it to our fellow citizens, mainly those who paid and are still paying the cost of our economy’s derailment. We have come a long way, we have left the recession behind us and got a second chance but there is still a lot which must be done,” he said after the meeting.
President Nicos Anastasiades also took to Twitter, saying this was the last memorandum related Eurogroup meeting on Cyprus.
Cyprus is the fourth euro area member state to exit its bailout following Ireland, Spain and Portugal. Cyprus used €7.25 billion of the total €10 billion earmarked in the financial bailout.
Shortly after the session, IMF Managing Director Christine Lagarde issued a statement of congratulations ahead of the island’s official exit on March 31.
“I wish to congratulate the people and the Government of Cyprus on their accomplishments under the economic adjustment programme, which has delivered an impressive turnaround of the economy during the past three years. The economy returned to positive growth last year, expanding by about 1.5 per cent,” she said.
“The banking system is on a much more solid footing and workouts of nonperforming loans are accelerating, opening space for new productive lending.”
Lagarde however cautioned that the reform momentum had to continue, especially in view of the renewed volatility in global financial markets.
“Further improving fundamentals and sustaining efforts to strengthen the resilience and flexibility of the Cypriot economy are essential to ensure that the legacies of the financial crisis are left far behind.”
“I am therefore encouraged by the authorities’ commitment to maintain prudent macroeconomic and fiscal policies and to continue promoting structural reforms.”
Largely echoing Lagarde, the Eurogroup in its own statement, congratulating Cypriot authorities said it “welcomes the fact that economic activity has continued on a positive trend, and the banking system has further healed.”
Eurogroup President Jeroen Dijsselbloem posted on Twitter “compliments to Cyprus. Financial assistance programme ends, back on path sustainable growth. Success story with strong commitment government.”
However to use Brussels jargon, Cyprus’ exit is considered “dirty” because the ninth review was left pending as Cyprus did not finalise its last prior action: the corporisation of the state-owned telecom company, CyTA, a step towards privatisation.
“The privatisation of the Cypriot Telecommunications Authority would be another growth-enhancing step,” the Eurogroup said.
“Along with public administration reform and other structural reforms discussed during the programme, this would cement the improvements in public finance and support sustained economic growth.”
Around 30 per cent of the €9bn programme envelope remains unutilised, it added.
In the three years of the programme, Cyprus has consistently outperformed its fiscal targets. Cyprus’ troika of lenders – the European Commission, the European Central Bank and the International Monetary Fund – projected that the Cypriot economy would plunge with a cumulative GDP reduction of 13 per cent in 2013 and 2014. However the economy proved more resilient than originally anticipated with tourism, the professional services sector and private consumption being the main drivers in containing the projected economic downturn.
This, in conjunction with the public expenditure reduction programme beat the troika’s projection over the primary balance (the balance prior the interest rate payments). Primary surplus was achieved in 2013, the first year of the programme and two years earlier than expected.
The same applies for the budget balance, with Cyprus essentially exiting the excessive deficit procedure (the corrective arm of the euro area when a member-state deficit exceeds three per cent of GDP) in 2014.
Improved public finances meant Cyprus only had to use €7.25 billion of the €10 billion bailout which led to a much lower public debt.
Initially the debt sustainability analysis carried out by the EU Commission projected that the island’s public debt would peak in 2015 at 126 per cent of GDP and would gradually decline to close to 100 per cent in 2020. However, Cyprus is exiting its programme with a debt of around 106 per cent, 20 percentage points below the troika projections.
According to the finance ministry’s latest estimates, the public debt will decline to 91 per cent by 2020.
As in all bailouts, the countries receiving financial assistance have to make their own contribution to the bailout. However, in the case of Cyprus the contribution proved to be particularly bloody, as it featured unprecedented provisions.
Lenders imposed a haircut on bank deposits or bail-in as a tool for recapitalising the banks. After wiping out banking shareholders and junior debt, 47.5 per cent of deposits over €100,000 were converted to equity to recapitalise Bank of Cyprus, the island’s largest lender whereas Laiki Bank was wound down with its clients losing their deposits except those below €100,000 which were transferred to Bank of Cyprus. As a result, a total of €9.4 billion in deposits and junior bonds were wiped out overnight.
Cyprus’ lenders also insisted that the operations of Cyprus’ banks in Greece should be “carved out” as a precondition of financial assistance. They aimed to eliminate contagion to Greece from the haircut and reduce the size of the island’s banking sector upfront.
According to figures submitted by former Central Bank of Cyprus governor, Panicos Demetriades, assets amounting to €16.4 billion and deposits worth €15 billion were essentially given away to Greek Pireaus Bank at the cost of €0.5 billion.
The island’s banking system which in 2012 accounted for 550 per cent of GDP shrank to 350 per cent in one fell swoop.
The haircut was accompanied by the imposition of capital controls that were lifted altogether in 2015.
The new insolvency and foreclosure legislation as well as that which 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. These continue to make up almost half of the overall loan portfolio.
Under the new Euro area rules, Cyprus will continue to be under surveillance by its lenders with bi-annual post-programme visits until it repays 75 per cent of the economic assistance it received.
Although, public debt is on a downward path, its management remains a challenge even though the finance ministry has softened up the debt’s maturity profile. But in 2019 large debt amortisations begin and despite market access being restored, Cyprus’ ratings are still considered as non-investment grade. This means it will be excluded from the ECB public securities purchasing programme which would help to lower Cypriot bonds yields. The challenge for the government is to reach investment grade that would lead to lower borrowing costs.