25/03/2013 - Economic and Financial Affairs Council (ECOFIN)
Eurogroup reaches an agreement with Cyprus
On 25 March the euro area finance ministers reached a political agreement with the Cyprus authorities on the key elements paving the way for the future economic adjustment programme. The aim of the programme is to form the basis for restoring the soundness of Cyprus' public finances and the viability of its financial sector. The programme's financial assistance envelope is estimated at up to 10 billion euro.
© European Union, 2013
The conditions agreed last night focus on addressing imbalances in Cyprus' large financial sector. The aim is to reduce the size of the sector to the EU average by 2018.
Conditions relating to the financial sector
Two of Cyprus' largest banks – Laiki and Bank of Cyprus – will undergo restructuring right away.
Laiki will be resolved immediately. This will be done by splitting it into a "good bank" and a "bad bank".
While the bad bank will be run down over time, the good bank will be integrated into Bank of Cyprus. Bank of Cyprus will be recapitalised through a conversion of uninsured deposits (above €100 000) to equity and with the full contribution of equity shareholders and bondholders.
"I would like to emphasise that none of these measures will affect deposits below 100 000 euro. There should be no doubts about that. We reaffirmed today the importance of fully guaranteeing these deposits in the EU", said Eurogroup President Jeroen Dijsselbloem.
The Cyprus authorities and the European Commission, in liaison with the European Central Bank (ECB) and the International Monetary Fund (IMF), were requested to finalise the memorandum of understanding (MoU) for the programme in early April.
The MoU will contain ambitious measures in the areas of structural reforms, fiscal consolidation and privatisation. The Cyprus government is committed to taking further fiscal measures, such as an increase in the withholding tax on capital income and the statutory corporate income tax rate.
In addition, the Eurogroup welcomed Cyprus' resolve to carry out an independent evaluation of how the anti-money laundering laws are being implemented in its financial institutions. If any problems are identified in this area, the future economic adjustment programme will contain measures to correct them.
Euro area member states will begin the national procedures that are required to approve the financial assistance to be provided by the European Stability Mechanism (ESM) under the future adjustment programme.
The aim is to approve the financial assistance facility agreement by the third week of April.
Cyprus submitted its request for financial assistance from the euro area and the IMF in June 2012.
Its large financial sector has been severely exposed to spill-over effects from sovereign market turbulence, while the economy has been facing serious macroeconomic imbalances. All this made the task of the Cyprus authorities to ensure sustainable public finances particularly challenging.
When a member state is facing financing difficulties, the euro area may provide financial assistance in order to safeguard financial stability in the monetary union. This is done under strict conditions, which are laid out in an adjustment programme. The programme sets out measures that the beneficiary country must take to address financial, fiscal and structural challenges.
Preparatory work started back in autumn 2012. The new Cyprus government, appointed after the presidential elections that took place in February, is committed to finalising the agreement on the programme as soon as possible.