Cyprus exited from its three-year bailout rescue programme at midnight on Thursday, March 31, but it will still have to repay the principal on ESM loans from 2025 to 2031.
Cyprus used up only EUR 6.3 bln from the ESM, plus EUR 1 bln from the IMF, out of a EUR 10 bln envelope agreed with creditors in March 2013. That was due to private participation in bank recapitalisation and early restoration of market access.
However, it lost some EUR 500 mln in final funding due to a delay in the privatisation reforms and a stagnation in efforts to restructure the public health sector and the telecom and power utilities, Cyta and EAC.
Cyprus is already tapping the bond markets, since June 2014, when it issued 5-year paper at a yield of 4.85%. The ESM noted that just one year earlier, in July 2013, the corresponding bond yield had been almost 14%. The much lower interest rate in 2014 shows how quickly Cyprus regained the trust of investors thanks to its reforms. The 10-year yield reached 3.8% at the end of 2015.
In the course of the past three years Cyprus had to restore the stability of the banking sector by thoroughly restructuring and downsizing financial institutions, cut the excessive government deficit, in particular by reducing current primary expenditure and increasing the efficiency of public spending, and implement structural reforms to support competitiveness and sustainable and balanced growth.
According to EU data, growth has returned in 2015 (1.6%) after three years of recession and is expected to continue in 2016 (1.5%) and 2017 (2%), public deficit amounts 1% in 2015 from nearly 6% in 2012, the “oversized financial sector was significantly downsized and restructured”, capital controls were fully lifted in April 2015, unemployment is on the decline and state finances secured a sound debt profile and a cash buffer of over EUR 1 bln, no longer requiring financial assistance.
The ESM stressed that it will continue to work closely with Cypriot authorities to ensure timely loan repayments, through the ESM’s Early Warning System, designed to detect repayment risks and allow for corrective actions, while the authorities will have to submit adjustment reports twice a year. For that purpose, the ESM will receive regular reporting and will join the European Commission twice a year for its post-programme surveillance missions.
ESM attributes the Cyprus bailout to the rapid expansion of the financial sector and bank lending, to nine times the country’s GDP, compared to the current ratio of domestic bank assets of 3.5 times GDP (close to the EU average) the excessive budget deficits and record high current account deficits, reflecting Cyprus’s falling competitiveness.
“The banks’ exposure to Greece and the deteriorating loan quality at home forced Cyprus’s largest banks to record substantial capital shortfalls. Bank credit policy, poor risk management practices, and insufficient supervision contributed to the problems. As a result, Cyprus lost market access and the Cypriot government requested financial assistance in June 2012”, says ESM in a statement.
Meanwhile, President Nicos Anastasiades tweeted that Cyprus’ exit from the economic adjustment programme marks a new day and new responsibilities.
Cyprus is the fourth euro area member state to exit its bailout following Ireland, Spain and Portugal.