NICOSIA, July 7 (Xinhua) — The European Commission has warned Cyprus of considerable increased risks to fiscal stability, as the Cypriot government is trying to contain a banking crisis by pumping billions of euros into the ailing state-owned Cyprus Cooperative Bank (CCB), according to a statement made available in Nicosia on Saturday.
The statement referred to Cyprus’ “remarkably strong fiscal performance” but warned that developments are “subject to uncertainties mainly in relation to the financial sector developments, in particular on the budgetary impact of the government transaction related to the CCB.”
The government has issued 2.35 billion euros (2.7 billion U.S. dollars) in government bonds to facilitate the sale of the “good part” of the CCB to Hellenic Bank, after the government obtained its bad part, non-performing loans amounting to over 7 billion euros, as part of strategy to reduce the high stock of non-performing loans in the banking sector.
The Commission’s warning came as a parliamentary committee toiled for a sixth day in a row to prepare legislation demanded by the European Union to make easier for banks to manage non-performing loans.
The legislation is expected to go before an unusual Sunday afternoon parliamentary plenary session, where it is expected to be passed by the 19 deputies of the ruling DISY party and 10 deputies of opposition DIKO party in the 56-seat chamber.
Parliament agreed to meet on Sunday to avoid extending into next week a run on CCB branches which resulted in the withdrawal of 500 billion euros within a week.
The government had to compromise its legislative proposal on insolvency and foreclosures by accepting several amendments made by DIKO to secure its support.
Among other measures, the government urgently introduced a plan called Estia (home) to make it easier for about 15,000 loan owners to start repaying a total of 3.5 billion euros of non-performing loans.
The plan provides for the reduction of the loans and the government paying one third of the monthly loan installments. It is expected to cost the taxpayers tens of millions of euros each year.
The government made the plan conditional on the passing of a bill providing for compensation to Hellenic Bank for unforeseen losses from its purchase of CCB, so as to conclude the sale agreement.
The additional expenditure will result in a sharp increase of the sovereign debt, just as the government managed to bring it down to below 100 percent of gross demestic product (GDP).
The sovereign debt shot up to about 107 percent as a result of the 2013 10-billion-euro bail-out of Cyprus by the Eurogroup and the International Monetary Fund.
However, the European Commission said it was confident that given the strong fiscal performance by Cyprus, sizeable surpluses and the one-off nature of the public debt increase, sovereign debt will start declining steadily after spiking at to 105.7 percent of GDP. (1 euro=1.18 U.S. dollar) Enditem