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25/08/2016

Cyprus parliament rejects Troika-imposed privatisation plan

Euro & Finance

Cyprus parliament rejects Troika-imposed privatisation plan

cyprus.jpg

International aid to cash-starved Cyprus was thrown into turmoil yesterday (27 February) after its parliament rejected a privatisation plan, throwing into disarray the disbursement of a new tranche of financial assistance next month.

The rejection dealt an unexpected setback to an administration that has gained plaudits in three reviews from its borrowers, the International Monetary Fund and the European Union, for meeting bailout commitments.

In a cliffhanger vote on a roadmap for mandatory privatisations demanded by lenders, 25 lawmakers turned down the motion, 25 approved it and there were five abstentions, rendering the bill null under parliamentary regulations.

Earlier, hundreds of workers at corporations facing privatisation staged an angry protest outside parliament. Protests against the privatisation of the semi-governmental utilities have been onboing since 24 February.

Thursday's vote carried overtones of a chaotic bailout almost a year ago, when the parliament rejected terms for international aid, rendering the loan conditions significantly worse days later.

It was not immediately clear if the government would try to call a new session of parliament to debate modified proposals.

The eastern Mediterranean island's government had warned lawmakers that the roadmap must be in place by 5 March Cyprus to be eligible for a new aid instalment.

"We are determined to maintain the course towards recovery and stability," a senior finance ministry source told Reuters, adding the cabinet would review the situation on Friday.

Utilities due for sale

Approval of a privatisation plan is mandatory under terms of an EU/IMF bailout Cyprus secured in March 2013, pulling it back from the brink of bankruptcy with 10 billion in aid.

Without approval of the legislation, Cyprus cannot get a fourth tranche of about 236 million euros in aid next month. The state has already received almost half its bailout amount.

As part of its commitments to pay down debt, Cyprus is expected to privatise three major public utility corporations – Cyprus Telecoms CyTA, the Electricity Authority and the Cyprus Ports Authority – to raise some 1.4 billion by 2018.

According to a confidential roadmap prepared by the finance ministry and seen by Reuters, authorities plan to convert the corporations into joint-stock companies initially, then seek strategic investors later, with options for part-ownership also offered to staff.

Thursday's rejection of the privatisation motion was aided by some members of the Democratic Party, which had until then been a junior coalition partner in Cyprus's centre-right coalition government.

The party had earlier announced its decision to quit the government in disagreement over its handling of reunification talks with the island's estranged Turkish Cypriot community.

Background

The banking sector of Cyprus was badly hit by the Greek government-debt crisis and especially the ‘haircut’ in which holders of Greek governmental bonds accepted substantial losses.

Cyprus clinched a last-ditch deal with international lenders in March 2013 to shut down Laiki, its second largest bank and inflict heavy losses on uninsured depositors in return for a €10-billion bailout.

The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations in Brussels between President Nicos Anastasiades and representatives of the Troika: the European Union, the European Central Bank and the International Monetary Fund. The Troika required Cyprus to raise €5.8 billion from its own sources in return for €10 billion in international loans.

The plan will spare Cyprus a financial meltdown by winding Laiki, and shifting deposits below €100,000 to the Bank of Cyprus to create a "good bank".

Deposits above €100,000 in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki's debts and recapitalise Bank of Cyprus through a deposit/equity conversion.