In 2013, Cypriot banks sustained approximately €4.5bn in losses following a politically induced haircut of Greek sovereign debt.. The reluctance of the Cypriot government at the time to restructure the assets of the Cypriot banking sector promptly harmed the credit rating of Cypriot government bonds. The state ultimately found itself unable to fund its budget via sovereign debt markets.
Cyprus’s €10 billon Economic Adjustment Program (often referred to as the “bail-out” program) provided for:
- Recapitalization of the entire banking sector
- Implementation of the anti-money laundering framework for Cypriot financial institutions
- Fiscal consolidation to reduce the Cypriot government budget deficit
- Structural reforms to restore competitiveness and macroeconomic imbalances
- Privatization of certain state owned entities
One of the main aims of the program was to restore depositor and market confidence by downsizing and restructuring the Cypriot banks.
Cyprus has made diligent progress in line with the terms agreed with its international creditors and the economy has fared very well to date. In 2015, Cyprus returned to economic growth and recorded a second-consecutive budget surplus exceeding 2.5% of GDP. Thanks to strict adherence to fiscal and other reforms, Cyprus has required only part of the €10bn available facility under the March 2013 bailout deal. Cyprus is gearing up for a “clean exit” from its bailout program, without requesting a precautionary credit line.
All Cyprus banks have been recapitalized, largely with private foreign equity. Today, these banks have Common Tier 1 ratios of more than 13%, comfortably above regulatory minimums. Capital controls have been abolished and overall bank deposits are slowly rising again quarter on quarter. Cyprus banks today have divested all of their Greek assets and have limited exposure to Greece. Furthermore, they have recognized provisions in their balance sheets averaging 50% of non-performing assets.