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Bank restrictions to be lifted by Spring 2014, says Cyprus Finance Minister

22 October, 2013

Finance Minister Charis Georgiades stressed Monday the need for proper management of the 10 billion euro loan agreement with the Troika (IMF, EC, ECB) to avert a new Memorandum.

He also said that restrictions on bank transactions, imposed after Eurogroup`s decision on Cyprus in March, will be gradually lifted by Spring 2014, except from the transfer of money to banks abroad.

Presenting the 2014 state budget before the House Committee on Financial and Budgetary Affairs, in the presence of the Governor of the Central Bank of Cyprus, Panicos Demetriades, the Minister stressed the need to implement the MoU with the Troika without the need for an additional loan.

The Finance Minister said that the Republic of Cyprus has so far obtained 47% of the 10 billion euro loan and added that "until 2016 we do not have any other sources of additional funding beyond the 10 billion provided by the loan agreement."

Georgiades pointed out that exiting the Memorandum with the Troika requires a return to the markets, something which needs, as he said, "the timely, effective and full implementation of the program."

The key feature of the budget, as the Minister explained, is the reduction in public spending. The Minister told the MPs that this was not an option but something that was imposed by the economic reality and many of the proposed savings should have been made long ago.

Pointing out that the loan agreement under the Memorandum (€ 10 billion) is the only source of funding, the Minister said that Cyprus has been excluded from the markets since Spring 2011 and cannot afford expenditure increases through lending that would cover deficits while lending from the internal market is no longer possible.

He also said that there is a balance in the state’s coffers from the 4.7 billion that has been pumped so far, which leads to the conclusion that the next tranche will probably be very small.

Georgiades asked the House Finance Committee to examine the proposed budget with the same strict approach which was applied in previous years when he was a member of the Committee.

"I am counting on the strict control by the Committee, in an effort to identify additional savings," he noted.

He stressed that 2014 “should and will be the year during which the most crucial decisions will be made”, aiming to correct economic figures, better manage public finances and stabilize the banking system.

"It`s time to make and implement decisions that were previously postponed," he pointed out.

The Minister said that public debt in 2014 will rise to 123%, while this year it will reach 114%.

Regarding restrictions on bank transactions, imposed by the Troika after the March Eurogroup decision, Georgiades said that the government has agreed on a road map with the Troika which provides for all restrictions to be lifted by Spring 2014, excluding transfer of money from Cyprus abroad.

“The transfer of money from a bank in Cyprus to a bank abroad will be the last measure to be lifted, for which there is no timetable yet", he explained.

In his statements, the Governor of the Central Bank of Cyprus said that there is foreign interest in Cyprus’ banking sector and excluded any new haircut on bank deposits, saying that this is ruled out in Cyprus’ rescue program with the Troika.

The Governor of the CB said that there is a capital cushion of 100 million euro for the Cooperative sector in Cyprus, from the amount of 1.5 billion that is provided in the Troika MoU to strengthen the Cooperatives’ capital adequacy.

As regards the Bank of Cyprus, Demetriades said that based on estimations by the firms Pimco and KPMG, the bank has funds which exceed 9% which is required as capital adequacy ratio. These funds, he said, reach 770 million euro.

He also said that Cyprus’ rescue program includes additional funds for the financial sector worth 1 billion euro, in addition to the 1.5 billion which were received by the Cooperative. Demetriades expressed conviction that Hellenic Bank will not be requiring any funds from the MoU.

As regards liquidity from the Eurosystem, Demetriades assured MPs that the European Central Bank will continue providing liquidity to Cyprus through its monetary policy.

President of the House Committee Nicolas Papadopoulos said that given the fact that 2014 will be the worst year as regards recession, the state budget will be a budget of “austerity and tough decisions”.

The ultimate goal, he noted, should be to restart the economy, adding that the implementation of the MoU with the Troika is a precondition to restore confidence in the Cypriot economy.

In addition, Papadopoulos expressed optimism, saying that it is encouraging that fiscal data for 2013 are slightly better than the initial estimations made by the Troika.

“There is still room for improvement of our fiscal data, provided that we take the right decisions at the right time”, he concluded.

The 2014 state budget predicts that government revenue will be limited to €6,638 mn, down by 1.3% compared to 2013 (€6,551 mn), while public spending will be reduced to €7,565 mn, decreased by 2% compared with 2013 (€7,725 mn).


The fiscal deficit is expected to reach 6.3% of GDP in 2014 and the primary deficit 1.4% provided that the budget will be implemented 100%. The budget foresees a contraction of 3.9% for 2014 and 8.7% for 2013.

The Ministry of Finance forecasts that unemployment will reach 19.5% in 2014 compared with 17% unemployment in 2013 and 11.8% in 2012. Inflation is expected to increase slightly to 1.2% in 2014 compared with 1% in 2013 and 3.1% in 2012. The current account balance as a percentage of GDP is expected to shrink by 2% in 2013 compared with 6.9% in 2012. The budget forecasts that the current account balance will shrink further by 0.6% in 2014.

Excluded from international capital markets since April 2011, Cyprus applied for financial assistance from the EU bailout mechanism, as its two largest banks, Bank of Cyprus (BoCY) and Cyprus Popular Bank (also called Laiki Bank) requested state support following mass losses as a result of the Greek sovereign debt haircut.

The aid package from the Troika featured a sizeable reduction of the island`s banking sector, as well as bail-in of uninsured deposits. Under the package agreed in March, Cyprus closed one bank, the Popular, whereas deposits over 100,000 euros held at the island’s biggest lender, Bank of Cyprus, lost 47.5% of their value, after being converted into bank shares.