Cyprus and Troika Final Terms of Agreement
The final terms of the bailout agreement between Cyprus and the Eurogroup made on March 25th, 2013 have been determined by Cyprus and the Troika (the EU, the International Monetary Fund and the European Central Bank).
Finalised terms are due to be formally approved on 12 April 2013, followed by implementation in Mid-May. Predominantly this concerns the payment of a €10bn loan to the Cypriot government. Interest on the loan will be between 2.5% and 2.7% and after a ten year initial grace period, the loan will be repaid over twelve years, although the Cypriot government has the right to repay it earlier if in a position to do so.
Additional measures of the Cyprus and Troika memorandum include salary reductions in public and semi-governmental sectors in order to protect the significant number of temporary employees, and 1.5% salary contributions from civil servants and persons entitled to free medical care. Semi-governmental organisations are due to be privatised over the subsequent five years and proceeds from natural gas in Cyprus will contribute to the loan repayments, with the Cypriot Government retaining control over management of the country’s natural resources.
From the 1st January 2013 the Corporate Income Tax rate in Cyprus will increase to 12.5% (previously 10%). The Cypriot Parliament have also increased special contributions passive interest income to 30% (previously 15%) for tax residents, and a special levy on deposits paid by banking institutions to 0.15%. A further €75 million is expected to be collected from increased rates of tax on Cypriot immovable property.
In terms of banking the Cypriot financial sector is due to be both downsized and restructured. The first step taken was by local banks who have abandoned their Greek operations in attempts to help stabilise the banking sectors in both Cyprus and Greece.
The two main banks affected by these changes are the Bank of Cyprus (BoC) and Laiki Bank which will be recapitalised and resolved respectively. Depositors in all other Cypriot banks, no matter what their deposit amount, will be fully protected.
Laiki Bank is the second most popular bank in Cyprus and has been resolved immediately under the Bank Resolution Framework. Losses made as a result of this resolution are being made up in part by contributions from equity shareholders, bondholders and uninsured depositors with over €100.0003.
The recapitalisation of the Bank of Cyprus has been achieved through a deposit/equity conversion which uses uninsured deposits and full contributions from equity shareholders and bondholders and is hoped to create a 9% capital ratio. So far 37.5% of uninsured deposits have been converted into Class A shares. A further 22.5% of deposits have been “frozen” and may be used for new class A shares if necessary.
Although shares have voting and dividend rights, the rights of existing shareholders and bondholders will be postponed until the dividends of Class A shareholders are to equal the initial contribution plus interest.
The Bank of Cyprus will take over all loans and credit facilities from Laiki Bank as well as insured deposits and deposits of charities, governmental and local authorities. The Bank of Cyprus will obtain liquidity from the Governing Council of the European Central Bank in accordance with regulations.
Capital controls imposed by the Cypriot government on money transfers are an important aspect of maintaining stability within the country’s banking sector. These temporary measures include limitations of the amount of cash withdrawn, restrictions on the movement of capital within and outside of the country, and mandatory renewal of maturing deposits.
However, these controls do not affect international business and the advantages of Cyprus’ business environment endure. Cyprus continues to offer tax exemptions on dividends received by companies, gains from the sale of shares and other securities, financial transaction tax, and withholding tax on the payment of dividends, interest, and royalties to non- Cypriot residents.
There are also deductions available for interest paid on loans for the acquisition of subsidiaries and net income from the licensing or sale of intellectual rights. In addition, Cyprus’s network of over fifty double taxation treaties worldwide remains strong and there is a high availability of skilled labour and high quality professional services in the country.
While some aspects of the banking crisis will inevitably be negative, there are actually many positives to be found from the situation. The circumstance has been retrieved from disaster by a series of measures and while these may restrict financial deposits and capital movement within the country, international business continues as usual.