Conclusion of ESM programme for Cyprus: an overview. 31 March 2016

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1 Conclusion of ESM programme for Cyprus: an overview 31 March 16

2 Cyprus s clean exit possible thanks to strong commitment to reforms Three years of extensive reforms and ESM/IMF support have delivered economic recovery Financial sector was restructured, downsized and recapitalised Macroeconomic imbalances were corrected, debt sustainability achieved Market access was restored Cyprus s bond yield and confidence indicator Confidence Indicator (EC) Gvt. Bond Yield (right hand scale) 1 Confidence Indicator: overall economic sentiment derived from 5 indicators: industry (weight 4), services (weight 3), consumer (), construction (5) and retail trade (5). Source: European Commission Source: European Commission, Bloomberg

3 Dec-5 Jun-6 Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-1 Dec-1 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 The origins of Cyprus s crisis Rapid expansion of financial sector after EU accession (4) and adoption of euro (8) Banking sector became oversized, with very poor lending practices, weak supervision, and concentrated exposure to Greece Macro and fiscal imbalances led to loss of market access Fiscal imbalances Oversized banking sector EUR billion Fiscal Balance Debt/GDP (right hand scale) Total assets Total assets/gdp (right hand scale) Total assets/gdp - EA average (right hand scale) Source: European Commission Source: ECB, Eurostat, ESM calculations

4 Financial assistance Cyprus financial assistance programme agreed by ESM and IMF in April/May 13 Initial programme amount: up to 1 billion; 6.3 billion was disbursed by ESM and around 1 billion by IMF ESM loan disbursements from May 13 to October 15 Breakdown of total financial assistance for Cyprus ( billion) ESM IMF Undisbursed funds 3

5 Financial assistance The ESM disbursed a total of 6.3 billion to Cyprus Loans included 1.5 billion for recapitalisation of the Cooperative Central Bank Ltd Repayment of loan principal starts in 5, ends in 31 Weighted average maturity of ESM loans: 14.9 years 1 Cyprus's ESM loan repayment profile ( million)

6 Key objectives of the adjustment programme Macro Fiscal Correcting the excessive government deficit Increasing the efficiency of the public sector Financial sector Downsizing, recapitalising and restructuring of the banking sector Modernising legal, foreclosure and insolvency frameworks Strengthening supervisory environment Structural Carrying out labour market reforms Removing obstacles in the services market Implementing privatisation programme 5

7 Programme success Cyprus s decision of a clean exit is supported by the Institutions Programme achievements: Economic prospects improved: to 1.6 growth in 15 from -5.9 recession in 13 Unemployment is gradually declining Fiscal adjustment outperformed initial targets: public deficit declined to 1 in 15 from 5.8 in 1 Liquidity and capital position of the banking system restored NPLs have peaked and are declining Market access was restored More than 1 billion cash buffer provides strong cushion 6

8 Fiscal adjustment helped to rebuild confidence Fiscal performance helped to regain market access After a deficit of almost 6 of GDP in 1, the budget balance is expected to be slightly positive in 16 Government debt is now declining Fiscal balance ( of GDP) Debt/GDP () Fiscal balance Initial programme target (EC) Debt/GDP Initial programme target (EC) Source: European Commission 7

9 Growth is better than expected GDP is expanding: real GDP has grown for three quarters in a row and leading indicators point to a continuation of the recovery Program implementation led to a smaller recession and to a faster recovery than initially expected GDP growth () Actual growth vs. initial targets () Quarter on quarter Year on year Actual Growth Initial programme target (EC) Source: Eurostat and European Commission (EC) 8

10 The Cypriot banking system is now well capitalised Public money was used for the recapitalisation of co-op banks only, the other systemic banks were recapitalised with private funds Bail-in was unavoidable to ensure debt sustainability Capital controls were a necessity to secure the liquidity of the banks. Controls were gradually relaxed and fully lifted in April 15 8 EUR billion Capital increases EUR billion Private capital State-Aid Q1 13 Q1 14 Q3 14 Q4 15 Total BoC bail-in Coops state-aid I BoC capital injection Hellenic capital injection Coops state-aid II Source: ESM 9

11 Mar.9 Jun.9 Sep.9 Dec.9 Mar.1 Jun.1 Sep.1 Dec.1 Mar.11 Jun.11 Sep.11 Dec.11 Mar.1 Jun.1 Sep.1 Dec.1 Mar.13 Jun.13 Sep.13 Dec.13 Mar.14 Jun.14 Sep.14 Dec.14 Mar.15 Jun.15 Reform agenda does not end with the programme Address NPLs: Active management of NPLs is essential to support recovery and financing of the economy 35 3 billion Non-performing loans and provisions 7 6 Securitisation law 5 5 Keep fiscal discipline Continue labour market reform Finalise privatisation agenda NPLs Provisions NPL ratio (right hand scale) Source: IMF, ESM calculation 1

12 Next steps: Early Warning System and post-programme surveillance The ESM will operate its Early Warning System (EWS) until loans are fully repaid Euro area Member States exiting financial assistance fall under postprogramme surveillance These countries will remain subject to enhanced surveillance until they have paid back a minimum of 75 of the assistance received Post-programme surveillance missions will be carried out twice a year by the European Commission with the ECB, IMF and the ESM 11

13 Summary: economic recovery is gaining momentum; challenges remain Fiscal consolidation efforts and bank restructuring ensured a successful return to funding in financial markets Cyprus is the fourth success story among EFSF/ESM programme countries (after Ireland, Spain, and Portugal) The example of Cyprus confirms that ESM s loans-for-reform approach works Challenges remain (high level of NPLs) and reform efforts must continue 1

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