* Funding to complement Troika programme, expected to end in 2020 *
The European Bank for Reconstruction and Development (EBRD) will start investing in Cyprus, most likely for a limited period, to help the country overcome transition challenges that have emerged during its severe economic crisis.
The EBRD’s board of governors, which represents the bank’s 66 shareholders, took this decision at the EBRD annual meeting in Warsaw.
The bank was responding to a request from the Cypriot authorities who said that a temporary engagement by the EBRD would “represent a positive contribution to efforts to reform and restructure the Cyprus economy”.
The agreement on the temporary change in Cyprus’ status to “recipient country”, which applies to the whole of the island, assumes that the bank will not engage in new operations in Cyprus after the end of 2020, the EBRD said in an announcement. (See video with comments by EBRD President Suma Chakrabarti http://www.financialmirror.com/web.php?vid=2685 )
This means that even if EBRD agrees to exercise the voting rights of the 18% of Bank of Cyprus shares representing ‘Legacy Laiki’ which is in the hands of the government, the fund will have to exit this agreement before 2020.
The EBRD’s activities in Cyprus, a founding EBRD shareholder, will be conducted in the context of an action plan being implemented by the Troika of the European Commission, the European Central Bank and the International Monetary Fund.
EBRD projects will aim to strengthen the financial sector, making it more robust to future shocks and improving its governance, the announcement said.
The bank will also support the authorities’ privatisation programme and it will assist in corporate restructuring while also providing finance to small and medium-sized enterprises, in support of the objectives of the Troika programme.
The bank said its operations will complement those of other international organisations and international financial institutions active on the island and intends to establish a local office with resident staff.
The Cypriot economy remains mired in a deep recession that emerged after a boom period between 2004, when Cyprus joined the EU, and 2008, when it adopted the euro. Despite making important progress towards European integration, significant transition challenges and a number of key structural issues have not been addressed, the EBRD said.
In particular, privatisation and modernisation of public utilities and infrastructure have largely stalled. Standards of governance and supervision in the banking sector need significant improvement.
Although performing well under the Troika programme, the short-term macroeconomic outlook for Cyprus remains challenging. The economy is expected to contract again in 2014. Modest growth is expected to return in 2015, but downside risks are significant. Unemployment is likely to continue rising for some time.
Meanwhile, Finance Minister Harris Georgiades has been elected Chairman of the EBRD Board of Governors for the period 2014-2015.
“Honored and privileged to serve as Chairman of the Board of Governors of the EBRD for 2014-15,” Georgiades wrote on Twitter having announced in an earlier tweet that EBRD has decided to commence operations in Cyprus.
The EBRD’s operations in Cyprus will assist the country to address its short and medium-term challenges, Georgiades said, adding that Cyprus’ request to be given recipient country status was for a “limited time.”
“Whilst achieving key objectives of the (Troika bailout) programme, most notably fiscal consolidation, and although the implementation of structural reforms and enhancing the regulatory and supervisory framework of our banking system provide the necessary conditions for accomplishing sound economic growth, they are unfortunately not sufficient,” Georgiades said in a statement released to the EBRD annual meeting.
“Much additional work needs to be done to support recovery of the real economy, especially in the current depressed economic environment characterised by strikingly lack of conditions of financial stability and rapidly rising unemployment and widespread closure of business enterprises,” he added.
He added that with the banks having a substantial part of their funds tied up in non-performing loans and engaging in deleveraging and recapitalisation, there is a critical lack of lending capacity for financing small and medium sized enterprises, which are the primary source of output and employment in Cyprus.
Based on this situation, Cyprus, he said, submitted at the end of 2013 a request o be granted a recipient country status for “limited period of time.”
“We believe that EBRD’s operations in Cyprus would significantly contribute in addressing the short and medium-term financial, fiscal and structural challenges the country faces today,” Georgiades said.
LENDING TO RUSSIA MAY DROP
Meanwhile, EBRD president Suma Chakrabarti said the bank’s shareholders were uneasy about Russia’s dealings with Ukraine and that the bank’s lending to Moscow could drop as the economy slows.
He said that EBRD’s funding in Russia slumped to 1.8 bln euros last year from 2.6 bln in 2012 due to what the development bank termed "difficult investment conditions."
"It could impact on our business volumes in a country the size of Russia if the economy keeps slowing because investment then slows," Chakrabarti told reporters.
The bank had no plans at the moment, however, to stop its funding to Russia in reaction to the annexation of Crimea in eastern Ukraine, despite a some shareholders seriously concerned at Russia's behaviour in eastern Ukraine.
