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EDITORIAL THOMAS PAPADOPOULOS, LLB (THESSALONIKI), MJUR, MPHIL, DPHIL (OXFORD), LECTURER AT THE DEPARTMENT OF LAW, EUROPEAN UNIVERSITY CYPRUS, VISITING LECTURER AT THE INTERNATIONAL HELLENIC UNIVERSITY (THESSALONIKI, GREECE) AND ATTORNEY AT LAW (GREECE)* The Republic of Cyprus was the last victim of the Eurozone crisis. The Eurozone crisis knocked the door of Cyprus due to the overexpansion of the Cyprus banking sector, ineffective supervision, regulatory problems, excessive public deficits and the `haircut' of the Greek State bonds in a previous bailout agreement. After a first agreement including a bank levy for all insured and uninsured bank depositors of Cyprus banks was rejected by the Cyprus House of Representatives, the Eurogroup, the European Commission, the European Central Bank and the International Monetary Fund reached a second bailout agreement for Cyprus.1 A Memorandum of Understanding on Specific Economic Policy Conditionality (MoU) was signed subsequently. On 30 April 2013, the MoU was ratified by Cyprus and came into effect. The MoU launched an ambitious economic adjustment programme, which focuses on issues concerning the banking sector, the public deficit and other general economic policy issues. According to the MoU, the economic adjustment programme will address short- and medium-term financial, fiscal and structural challenges facing Cyprus. One of the main objectives of the programme is to restore the soundness of the Cypriot banking sector and rebuild depositors' and market confidence by thoroughly restructuring and downsizing financial institutions, strengthening supervision and addressing expected capital shortfalls. A second objective is to continue the on-going process of fiscal consolidation in order to correct the excessive general government deficit as soon as possible, in particular through measures to reduce current primary expenditure, and maintain fiscal consolidation in the medium-term, in particular through measures to increase the efficiency of public spending within a medium-term budgetary framework, enhance revenue collection and improve the functioning of the public sector. Moreover, the programme seeks to implement structural reforms to support competitiveness and sustainable and balanced growth, allowing for the unwinding of macroeconomic imbalances, in particular by reforming the wage indexation system and removing obstacles to the smooth functioning of services markets.2 The downsizing and reform of the Cyprus banking and financial sector is one of the most important requirements of the MoU. The domestic banking sector, including the cooperative credit institutions, represented before crisis 550% of GDP. The necessary downsizing and restructuring of the banking sector include various measures and actions, such as the establishment of a comprehensive framework for the recovery and resolution of credit institutions, the carve-out of the Greek operations of the largest Cyprus banks, the resolution of Cyprus Popular Bank and the absorption of selected assets and liabilities by the Bank of Cyprus,3 the recapitalization of the Bank of Cyprus through a debt to equity conversion, without the use of public money, the restructuring and recapitalization of other Cyprus commercial banks, the monitoring of corporate and household indebtedness and the restructuring of the Cyprus cooperative credit institutions, as well as the alignment of their regulation and supervision with that of commercial banks. According to the MoU, strong efforts should be made to maximize bank recovery rates for nonperforming loans, while minimizing the incentives for strategic defaults by borrowers. Furthermore, Cyprus was bound to enhance its anti-money laundering framework in line with best practice. This latter issue attracted the attention of the media and of various politicians in Member States, during the negotiations for the bailout package. With regard to company law and corporate governance issues of the banking sector, the MoU requires the adoption of legislation which will strengthen banks' governance by prohibiting commercial banks and cooperative credit institutions from lending to independent board members, including their connected parties, and removing any board members in arrears on existing debts to their banks, while lending to other board members will be prohibited above a certain threshold. Loans and other credit facilities to each board member will be disclosed to the public. A majority of directors in banks' boards will be * Email: T.Papadopoulos@euc.ac.cy or firstname.lastname@example.org. 1 According to this second bailout agreement, insured depositors were not affected. 2 Memorandum of Understanding on Specific Economic Policy Conditionality (MoU), 1. 3 Cyprus Popular Bank (Laiki Bank) and Bank of Cyprus were the two largest banks of the Republic of Cyprus. Papadopoulos, Thomas. `Cyprus Bailout Deal: The Current State of Affairs'. European Company Law 10, no. 4/5 (2013): 137138. © 2013 Kluwer Law International BV, The Netherlands independent.4 Although all these measures aiming at the downsizing and reform of the Cyprus banking and financial sector must be implemented by the Cyprus government, their impact on the national economy and on the society must be measured very carefully and must be taken into account in the implementation process. Social sensitivities should not be neglected. After the March 2013 events and decisions, Cyprus banks cannot operate smoothly and the whole banking system is still dysfunctional because of the imposed strict capital controls. In order to stabilize the banking system in distress, the Cyprus government decided to adopt legislation on the enforcement of temporary restrictive measures on transactions in case of emergency. The rationale behind these restrictions was the lack of substantial liquidity and the significant risk of deposits outflow. It is certain that these restrictions will gradually be abolished. However, it is uncertain how their abolishment will enhance liquidity and capital flows for Cyprus businesses, investments and domestic market. In my opinion, time is the most crucial factor in Cyprus financial crisis; the Republic of Cyprus should take all the necessary measures in order to exit this financial crisis as soon as possible. It seems that the implementation of the MoU is the fastest, yet very hard and difficult, way exiting this financial crisis. The Cyprus government should implement this agreement and should proceed to all necessary reforms in its banking sector and in its economy. Two extremely important issues constitute incentives for exiting as quickly as possible the financial crisis and for restoring economic and political credibility: the recent discovery of significant amounts of hydrocarbons (natural gas) in the exclusive economic zone of Cyprus, as well as the problem arising from the Turkish occupation of the Northern part of the island. It is also certain that further problems will arise out of this MoU: recession, lawsuits, high unemployment, new bankruptcies, diminish of investment spending, reactions against the agreed reforms, discussions about a second bailout. Delays in the implementation of the MoU will definitely aggravate these problems. Memorandum of Understanding on Specific Economic Policy Conditionality (MoU), 2-10. OCTOBER 2013, VOLUME 10, ISSUE 4/5 EUROPEAN COMPANY LAW
European Company Law – Kluwer Law International
Published: Aug 1, 2013
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