Brussels, 20/07/2015 (Agence Europe) - The European Commission has welcomed the efforts of Cyprus towards its budgetary objectives, but notes a certain slow-down in the reforms in the financial services and privatisation sector, in its sixth monitoring report, published on Monday 20 July, on the implementation of the adjustment programme the island is applying in exchange for support under the European Stability Mechanism (ESM).
The Commission states that the budgetary objectives for 2014 have been met by a comfortable margin. Whereas the target set was a primary deficit of 1.3% of GDP, Cyprus has achieved a primary surplus (not including servicing of the debt) in the order of 2.6% of GDP. However, due to the timely effect of the recapitalisation of the co-operative banks, the public deficit in nominal terms reached 8.8% of GDP in 2014. Taking account of these budgetary results and updated macro-economic forecasts, the 2015 objective has been increased: primary budgetary surplus of 1.5% of GDP, as opposed to a deficit of 1.6%.
“The authorities will need to continue implementing their budget prudently in light of existing risks and, if required, take additional measures, in order to achieve a primary surplus of between 3% and 4% in the medium term”, to ensure that public debt is put on a sustainable downward path, the European institution stresses.
Due to this good budgetary performance, the ESM support is lower than anticipated and its impact on public debt will be less. Since the programme launched in March 2013, €6.1 billion have been dispersed, including €5.7 billion under the ESM. Needs between the start of the programme and the first quarter of 2015 ultimately stood at €5.1 billion (€1.5 billion to recapitalise the cooperative banks, €700 billion in budgetary requirements and €2.8 billion for medium and long-term debt repayments).
The Cypriot debt is expected to start to fall in 2015, from 106% to 98.8% in 2016, to reach a level in the region of 80% in 2020, or 20% less than the forecasts of the fifth monitoring mission.
As regards the implementation of the programme, the Commission states that the Cypriot authorities need to re-establish the positive balance sheet observed since July 2014. “There were some significant delays and partial compliance was observed in several areas, notably on some financial sector reforms, privatisation, tourism and revenue administration”, the Commission writes.
The most notable delay in the history of the Cypriot bailout plan is still the implementation of the property foreclosure framework, which was voted on in April of this year after months of negotiations (see EUROPE 11340). The Commission also notes that certain last-minute amendments adopted by the Cypriot parliament could water down the effectiveness of the insolvency framework. This is due to the measure allowing the Cypriot justice system to suspend foreclosures on primary residences for insolvent debtors without any obligation for these debtors. The impact of this amendment will depend on how it is interpreted, the Commission states. It goes on to express concern at a falling-off of political support for privatisations.
Lastly, the Commission notes the “systemically important” exposure of the Cypriot banking sector to that of Greece. The four main Greek banks (National Bank of Greece, Piraeus Bank, Alpha Bank and Eurobank) still have subsidiaries in Cyprus, and their total deposits amount to €7.6 billion, or 40% of GDP. (Elodie Lamer)