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Public debt grew €2.6bn in 2018 due to co-op collapse

Public debt grew by €2.6bn in 2018 primarily due to the state offering government bonds to Hellenic Bank as part of a deal where the latter absorbed the ‘good part’ of the state-run cooperative bank, MPs heard on Thursday.

Today, public debt stands at €21bn, or 97.67 per cent of GDP – with an interest of 2.2 per cent – treasury officials told legislators.

The debt includes the billions in financial assistance given to bail Cyprus out in 2013 via the European Stability Mechanism (ESM), and from the International Monetary Fund.

State treasurer Rea Georgiou said Cyprus is expected to repay the ESM by October 2031, and the IMF by January 2026.

The initial assistance programme amounted to €10bn, although ultimately only €7.3bn was disbursed: €6.3bn from the ESM and approximately €1bn from the IMF. Repayment of the loan principal to the ESM starts in 2025 and ends in 2031.

Reviewing the state of the government balance sheet, parliamentarians raised questions about the 2018 agreement where the ‘healthy’ assets of the now-defunct co-op bank were transferred to Hellenic Bank, with the state acting as guarantor.

The co-op’s ‘bad’ assets (including non-performing loans) were transferred to the Cyprus Asset Management Company, or Kedipes, a 100 per cent subsidiary of the co-op.

The deal between Hellenic and the state stipulated an ‘asset protection scheme’ where Kedipes, the successor entity to the co-op, undertook to compensate Hellenic in the future for potential losses resulting from debtors not servicing the loans (assets) previously held by the co-op and transferred to Hellenic.

In short, although these loans were now on Hellenic’s books, Kedipes would still be liable for their prompt servicing. In the event the loans fall into arrears, Hellenic can claim compensation from Kedipes.

This arrangement will be in effect for 11 years. Moreover, it is guaranteed by the state: if Kedipes is unable to satisfy Hellenic’s claims for compensation, the compensation will be paid directly by the state – effectively the taxpayer.

MPs heard that in October Hellenic intends to file its first compensation claim to Kedipes.

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