More than two decades after it helped found the EBRD, the crisis-stricken island state of Cyprus has had to go to the bank to ask for funds as it struggles to implement reforms imposed as part of last year’s bail-out.
The bank’s shareholders are expected to rubber stamp Cyprus’ request to become an EBRD “country of operation” at this week’s annual meetings. The country was a founding member of the bank in 1991.
The bank estimates its programmes in Cyprus will total between €500m and €700m between now and 2020, to support the restructuring of the financial sector and to assist in the privatisation of state enterprises.
Cyprus agreed a €10bn bail-out package from the troika of international lenders — the European Commission, European Central Bank and IMF — last March. The conditions of the deal included budget cuts, the privatisation of state assets and major restructuring to the banking sector.
Jean-Marc Peterschmitt, managing director for central and southeastern Europe at the EBRD, said the bank would work with the Cypriot authorities to help them to implement the reforms. “These reforms have common features with things we have seen in our countries of operation, particularly post-crisis,” he said.
As part of the bail-out deal Bank Laiki, the second largest bank in the country, was folded into the larger Bank of Cyprus, which was also restructured and recapitalised with state money. Depositors with over €100,000 in either bank were subject to capital controls.
The Cypriot government was left with a 19% equity stake in Laiki, which it has been preparing to sell to institutional investors. Local press reports in Cyprus, citing finance ministry sources, claim the EBRD could take over this stake.
“I think we need to discuss this in much more detail with the Cyprus authorities,” Peterschmitt said, although he acknowledged that “what Cyprus most needs is people prepared to invest money in the form of loans, and even more so, in the form of equity”.
He denied the bank’s new role in Cyprus was an indication that it would expand its support to other countries within the EU that had been bailed out.
“One really has to see Cyprus as an exception,” he said. “There are very specific circumstances there that make this unique.”
Fiona Cullen, director of Cypriot economic research firm Sapienta Economics, said the EBRD’s intervention in the banking sector could give other investors confidence in a sector that has suffered from poor governance.
“The good thing about EBRD investments is that, as a AAA rated bank, it gives some comfort to investors,” she said. “It deals in countries with a much more challenging economic and political crisis than Cyprus, but we have had a major banking crisis here. One of the reasons for that banking crisis was poor governance.”
Non-performing loan ratios are in the high 40% range at some institutions, while the capital controls imposed last year have hollowed out the financial services industry, Cullen said. Cyprus was also a haven for Russian depositors, and the threat of further sanctions on Russian companies and company bosses was casting a further shadow over the sector.
“The very fact that we had a banking crisis and they imposed capital controls clearly had a big impact on the exports of financial services,” said Cullen. “I think for the time being the sanctions are not so painful, but if they get more intense then I think it will hit the banking sector and the professional services sector.”