(1)

Article 136(1) of the Treaty on the Functioning of the European Union (TFEU) foresees the possibility of adopting measures specific to Member States whose currency is the euro in order to ensure the proper functioning of economic and monetary union.

(2)

On 13 July 2010, the Council adopted a Decision under Article 126(6) of the TFEU stating that an excessive deficit existed in Cyprus (1) and issued a Recommendation to Cyprus under Article 126(7) of the TFEU with a view to bringing an end to the situation of an excessive government deficit stating that ‘Cyprus’s authorities should put an end to the present excessive deficit situation as rapidly as possible and at the latest by 2012’.

(3)

In the Council’s Recommendation of 10 July 2012 on the National Reform Programme 2012 of Cyprus and delivering a Council opinion on the Stability Programme of Cyprus, 2012-2015 (2), the Council recommended, inter alia, that Cyprus take action to achieve a durable correction of its excessive deficit in 2012, ensure sufficient progress with its debt reduction benchmark, strengthen regulatory provisions for the efficient recapitalisation of the financial institutions and improve competitiveness.

(4)

Cyprus has been under increasing pressure in financial markets, against the background of rising concerns about the sustainability of its public finances, including the required significant public support measures to the weakened financial sector. Some of the imbalances have emerged as a result of negative spill-over effects from the euro area crisis, including developments in Greece. Other imbalances, as specified in the Commission’s 2012 in-depth review for Cyprus and in the Council Recommendation of 10 July 2012, have been domestic and longer-lasting. Amidst consecutive downgrades of Cypriot sovereign bonds by credit rating agencies, the country became unable to refinance itself at rates compatible with long-term fiscal sustainability. In parallel, the banking sector was increasingly cut-off from international market funding and major institutions recorded substantial capital shortfalls.

(5)

In view of these severely adverse economic and financial conditions, the Cypriot authorities officially requested financial assistance under the terms of a loan by the European Financial Stability Facility/European Stability Mechanism (ESM) on 25 June 2012, as well as from the International Monetary Fund (IMF), with a view to supporting the return of Cyprus’ economy to sustainable growth, ensuring a properly-functioning banking system and safeguarding financial stability in the Union and in the euro area. On 27 June 2012, the Eurogroup invited the Commission, in liaison with the European Central Bank (ECB), the Cypriot authorities, and the IMF to agree on a macroeconomic adjustment programme for Cyprus, including its financing needs, and to take appropriate action to safeguard financial stability in the current very challenging environment where there is a risk of spill-over effects from sovereign market turbulence. On 25 March 2013, the Eurogroup reached a political agreement with the Cypriot authorities on the cornerstones of a macroeconomic adjustment programme. The banking sector was to be restructured and downsized and efforts were to be stepped-up on fiscal consolidation, structural reforms and privatisation. In addition, the recapitalisation of the two largest banks was to be exclusively generated from within those banks (i.e. from shareholders, bondholders and depositors).

(6)

In the current circumstances, Cyprus should adopt a comprehensive policy package to be implemented in a three-year macroeconomic adjustment programme which would span from 2013 (Q2) to 2016 (Q1).

(7)

The comprehensive policy package should aim to restore financial market confidence, re-establish sound macroeconomic balances and enable the economy to return to sustainable growth. It should be structured on three pillars. The first pillar should be a financial sector strategy based on restructuring and downsizing financial institutions and strengthening supervision of the sector, with efforts to address capital and liquidity shortfalls. The second pillar should be an ambitious front-loaded fiscal consolidation strategy to be implemented, in particular, by means of measures to reduce current primary expenditure, enhance government revenue, improve the functioning of the public sector and maintain fiscal consolidation in the medium-term, while minimising the impact on disadvantaged people and preserving the good implementation of Structural and other Union Funds. The third pillar should consist of an ambitious structural reform agenda, with a view to supporting competitiveness and sustainable and balanced growth, allowing for the unwinding of macroeconomic imbalances, in particular by reforming the wage indexation system, in consultation with social partners, and removing obstacles to the smooth functioning of markets. Recalling the political agreement of 28 February 2013 on a Council Recommendation on Establishing a Youth Guarantee, opportunities for young people and their employability prospects should be maintained.

(8)

Under the Commission services’ update of the 2012 winter forecast for nominal GDP growth (– 0,5 % in 2012, – 8,2 % in 2013, – 2,9 % in 2014, 2,6 % in 2015 and 3,7 % in 2016), the debt-to-GDP ratio would amount to 87 % in 2012, 109 % in 2013, 123 % in 2014, 126 % in 2015 and 122 % in 2016. The debt-to-GDP ratio would therefore increase rapidly until 2015 and move to a declining path thereafter, reaching an estimated 105 % in 2020. Debt dynamics are affected by several below-the-line operations. Under the Commission services’ update of the 2013 winter forecast for nominal GDP growth, the primary general government balance is projected to attain a deficit of EUR 395 million (2,4 % of GDP) in 2013, a deficit of EUR 678 million (4,3 % of GDP) in 2014, a deficit of EUR 344 million (2,1 % of GDP) in 2015 and a surplus of EUR 204 million (1,2 % of GDP) in 2016.

(9)

Enhancing the long-term resilience of the Cypriot banking sector is critical to restoring financial stability in Cyprus and consequently, given the strong links, to preserving financial stability in the euro area as a whole. Substantial downsizing and restructuring of the Cypriot banking sector is under way. The Cypriot House of Representatives adopted legislation establishing a comprehensive framework for the recovery and resolution of credit institutions. Using that new framework, the Cypriot banking sector has been downsized immediately and significantly. To preserve the liquidity of the Cypriot banking sector, temporary administrative measures have been imposed, including capital controls.

(10)

The implementation of comprehensive and ambitious reforms in financial, fiscal and structural areas should safeguard the medium-term sustainability of the Cypriot public debt.

(11)

The Commission, in liaison with the ECB and, where appropriate, with the IMF, should verify at regular intervals the rigorous implementation of Cyprus’ macroeconomic adjustment programme through missions and regular reporting, on a quarterly basis, by the Cypriot authorities.

(12)

Throughout the implementation of Cyprus’ comprehensive policy package, the Commission should provide additional policy advice and technical assistance in specific areas.

(13)

The Cypriot authorities should involve, in accordance with current national rules and practices, the social partners and civil society organisations in the preparation, implementation, monitoring and evaluation of the macroeconomic adjustment programme.

(14)

Any form of financial assistance received by Cyprus to help it implement the policies under its macroeconomic adjustment programme should be in line with the legal requirements and policies of the Union, in particular the Union’s economic governance framework. Any intervention in support of financial institutions should be carried out in accordance with the Union’s rules on competition. The Commission should ensure that any measures laid down in a Memorandum of Understanding in the context of requested ESM financial assistance is fully consistent with this Decision,