Not so long ago, Cyprus was in touching distance of financial collapse, but just a few years down the line its fortunes have taken a turn for the better. The Minister of Finance for Cyprus, Mr. Harris Georgiades, today informed Ms. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), of his government’s decision to cancel the Extended Fund Facility (EFF) arrangement which was scheduled to expire on May 14, 2016, with immediate effect.
The bold move to exit its 10 billion euro ($11 billion) bailout with no successor arrangement was commended by the Eurogroup of euro zone finance ministers, one of the bodies to have overseen the implementation of Cyprus’s bailout program.
With around 30 percent of its bailout funds untouched, the swift exit is highly important for Cyprus as it stamps a seal of approval on the island’s return to credibility on the international financial markets.
Cyprus’s banking system collapsed back in 2013, largely due to its exposure to Greece which had itself experienced a sovereign debt crisis in 2012. In return for the 10 billion euro bailout, Cyprus agreed to implement banking controls to contribute to paving the way to rescuing its banks.
The Cyprus Popular Bank was consequently wound down and the Bank of Cyprus was recapitalised by controversial measures including the default on depositors’ uninsured savings above 100,000 euros ($120,000). Cyprus was given the financial lifeline overseen by the “troika” of financial institutions including the International Monetary Fund (IMF), European Central Bank (ECB) and European Commission.
In a statement issued by the IMF’s Managing Director, Christine Lagarde said she “wished to congratulate the people and the Government of Cyprus on their accomplishments under the economic adjustment program, which has delivered an impressive turnaround of the economy during the past three years.”
The Cypriot economy returned to positive growth last year, increasing by around 1.5 percent. The banking system is much improved and on a solid footing and workouts of nonperforming loans are accelerating, leading the way for new productive lending. The fiscal position has been restored to a sustainable path and public debt is now firmly on a downward trend. In addition, Cyprus has regained access to the international capital markets while successfully issuing three Eurobonds in under two years.
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Christine Lagarde further commented: “building on these achievements, the reform momentum must continue, especially in view of the renewed volatility in global financial markets. Further improving fundamentals and sustaining efforts to strengthen the resilience and flexibility of the Cypriot economy are essential to ensure that the legacies of the financial crisis are left far behind.”
The Eurogroup has also welcomed the fact that economic activity has continued on an upward trend and the banking system has improved further. The commitment of the authorities and the Cypriot people to the overall programme agreements has also been essential to a fiscal performance that has surpassed expectations.
These positive developments have been instrumental in regaining investor confidence in the Cypriot economy, with the sovereign returning to the international markets.
The news is positive for foreign exchange and CFDs brokers located on the island, but it comes with some future expectations of fiscal prudence from the country. During the Cypriot banking crisis a number of brokers scrambled to reassure their depositors about the safety of their funds, however for higher net worth individuals the assurances have not been enough.
The Eurogroup also acknowledged that work must continue with determination to secure the reduction of the non-performing loan ratio to “healthier levels”. This includes the rigorous and swift implementation of the insolvency framework and foreclosure laws adopted in 2015, together with further measures including the legislation on sale of assets and effective use of the full range of the available non-performing loan management tools.
The Eurogroup additionally welcomed the reaffirmed commitment by the Cypriot authorities to sustain public finances consolidation and the reform momentum in order to address any remaining vulnerabilities and has pledged to continue supporting the country’s reform process.
While much of Cyprus’s success in completing its bailout program has been due to its strict adherence to austerity measures and the implementation of public sector and pension system reforms and a privatization plan that was required by the troika, the Eurogroup is aware that Cyprus could now take its eye off the ball. Although it acknowledges that Cyprus’s banking system has experienced a “deep transformation,” it believes that work must continue with determination to restore the stability of the banking sector in Cyprus.