Cyprus Mail

Co-op stock donation to have a fiscal impact, treasury says (updated)


The handover of 25 per cent of Cooperative Central Bank stock to its depositors and borrowers, which the government decided on May 31, may be reflected on the budget, according to the Treasury, something Finance Minister Harris Georgiades denied.

There will be “absolutely no fiscal impact,” Georgiades texted in response to a Cyprus Business Mail question.

Earlier, a Treasury official, who spoke on condition of anonymity on behalf of the Treasury’s director Rea Georgiou, said that in case the government goes ahead with the grant in kind, there will be a “readjustment in fiscal figures prepared by Cystat and sent to Eurostat”.

The readjustment will take either the value at the time of the transaction of the stock -which the Cooperative Central Bank wants to list on the Cyprus Stock Exchange by the end of September 2018- or its fair value based on an evaluation, the official said.

A Cystat official said that the statistical service will decide after the implementation of the policy how to treat it in the government accounts.

While the government currently does not have an actual balance sheet, reflecting the value of total assets and liabilities, and is expected to have one in place in 2020, it includes in its fiscal figures other types of grants in kind, such as land plots to displaced families, he said. “In the case of the plots we book them based on their market value,” the Treasury official added.

The government, which extended on two occasions in 2014 and 2015 a capital injection of €1.5bn and €175m to the lender and owns 99 per cent of its stock, decided on Wednesday to hand over a quarter of the bank’s shares to depositors with over €2,000 in deposits and reliable borrowers free of charge. The fiscal impact of the two capital increases amounted to 8.5 per cent of the economy in 2014, and 1 per cent the following year.

“This was in the absence of a government balance sheet, which would have enabled recording an asset rise offsetting the capital increase in the form of an increase in government debt,” a source familiar with the matter said in a telephone interview.

As the value of the stock held by the government, and in the absence of a clear guideline on how to treat the donation, estimated at €1.2bn, the potential fiscal impact of implementing the government policy may be as much as €300m, roughly 1.6 per cent of economic output. On the other hand, given that Bank of Cyprus which is better performing, has a net asset value of €3.1bn and has a market capitalisation of below €1.5bn, it is likely that the value of the Co-op stock may be well below book value.

To which extent this policy will affect the budget should the government have to include the grant in the budget accounts, remains unknown.

“It would be useful for the government to explain the rationale and the cost linked to this decision,” commented Alexander Michaelides, who teaches finance at the London-based Imperial College.

The government should also explain “how much this present will cost” and “whether it will impact positively or negatively on investor predisposition to invest in the company” owned to 25 per cent by its customers, he said.

Following the listing at the Nicosia-based exchange, the Cooperative Central Bank is bound to carry out successive share issues and so dilute the government’s state to 25 per cent.

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