(Adds more finance minister comment in fifth paragraph)
By Stelios Orphanides
Finance Minister Harris Georgiades said that the council of ministers decided to utilise the National Solidarity Fund (NSF), set up four years ago, for the “partial alleviation” of the effects of the 2013 banking crisis.
Talking to reporters at a news conference on Thursday, just hours after the Fiscal Council warned of the risks for the budget and economy stemming from promises ahead of next year’s presidential election, Georgiades said that the government decided to transfer an initial €25 million to the NSF and will consider also the transfer of other unused state assets which he did not specify.
“In the second half of 2018, the amount of the next contribution to the fund will be determined and this procedure will be repeated over the next years on the basis of our financial capabilities without risking fiscal and economic stability,” the minister said. “We consider this as the only realistic option, even if it doesn’t offer immediate remedy. It is an implementable proposal compared to various unrealistic and non-implementable proposals tabled from time to time”.
The finance minister said that specifics related to eligibility will be determined at a later stage and added that by proposing the scheme, the government does not assume legal responsibility for the losses suffered by depositors, bondholders and shareholders of banks in 2013. He added that the scheme is not a plan to compensate the above groups and aims instead at “safeguarding social cohesion”.
As part of Cyprus’s bailout agreement, depositors at Bank of Cyprus saw almost half of their uninsured deposits converted to equity while those at Cyprus Popular Bank, also known as Laiki, lost all their deposits in excess of €100,000. This measure was deemed necessary as the conversion of contingent convertible bonds (CoCos) purchased by retail and institutional investors was insufficient to recapitalise the two banks and as a result affected this category of investors. The cumulative depositors’ loss is estimated at €8bn, more than four-tenths of the economy, while that of bondholders was about €1.5bn.
Georgiades said that the pay-out of funds from the NSF will be based on a budget that the council of ministers and the parliament will have to approve and added that ‘the preparation of the scheme will be based on the premise that it will take into account a series of legal, financial and social parameters and will be in line with the constitution’.
The fund, he added, will start to operate after it grows well beyond the first €25m made available now as part of the government’s ‘social policy’.
“Whether everyone will get something and what it is not something that will be decided at this stage,” he added. “There will certainly be both social, financial and legal criteria when we reach the stage of pay-outs.”
On October 30, the president of Disy, the party of president Averof Neofytou, said that the NSF only received contributions from an unnamed retired Cypriot living in Canada, who paid his pension every month.
The finance minister added that the amount of €25m made available now is unrelated to the scheme to compensate provident funds for losses suffered in 2013. The government pledged to compensate these funds with 75 per cent of their losses with a €100,000 cap per member in order to avoid treating beneficiaries better than depositors.
Georgiades who repeatedly in his almost five-year tenure at the ministry rejected ‘practices of the past’ which led to the recent fiscal derailment, rejected criticism that the government’s decision to compensate depositors is a return to past practices.
“In the past, the government spent €1 billion in funds it didn’t have,” he said in reference to the average size of the fiscal deficit under the administration under Demetris Christofias.
“In 2017, we will have the biggest fiscal surplus for years now,” he said. “This, I believe, constitutes a very strong message to international markets, which in response to the drastic improvement of the Republic of Cyprus’s finances, already have driven its borrowing cost to the lowest level ever”.
The government generated last year a fiscal surplus of 0.5 per cent of economic output compared with a 1.2 per cent deficit the year before. It is projected to generate this year a surplus of 0.9 per cent. The economy, which emerged in 2015 from a prolonged recession, expanded by 3 per cent last year and is projected to grow 3.5 per cent or more this year.