House passes law on bank bond guarantee

PARLIAMENT last night passed a law allowing the state to guarantee bank bonds and new loans, in a move designed to provide credit to the struggling economy.
It comes two days after the scheme was cleared by the European Commission, which found the plan proposed by Nicosia was in line with EU state aid rules.
The purpose of the state guarantee scheme is to facilitate the access of eligible credit institutions to medium-term funding. It is part of efforts to stabilise the local financial sector up to the end of the year.
State guarantees will be provided for a period no less than three months and no greater than five years, under bilateral agreements between the government and credit institutions.
The law provides for state guarantees for up to €3 billion, although the initial draft of the government bill called for guarantees double that amount.
The amount was revised downwards due to objections from opposition parties raised yesterday during meetings with Finance Ministry officials to hammer out the final draft.
The legislation also mandates that any single state guarantee exceeding €500 million must be submitted to, and sanctioned by, the House Finance Committee.
In October 2012, Cyprus notified the European Commission of plans to introduce a public guarantee scheme for credit institutions. The guarantees will be covering, against remuneration and eligible collateral, new loans concluded and/or new bonds issued before 31 December 2012, with a maturity of up to five years.
The scheme is open to all credit institutions incorporated in Cyprus, including subsidiaries of foreign banks and cooperative credit institutions. Beneficiaries have to pay a remuneration that is aligned with EU state aid rules.
Moreover, beneficiaries will be subject to behavioural commitments to avoid any abusive use of the state support. These include limitations on expansion and marketing and conditions for staff remuneration and bonus payments.
Cyprus applied for a full EU rescue package in June after its two largest lenders could not meet new capital reserve limits owing to huge losses they sustained on their exposure to bailed-out Greece.
In September, the Commission approved on a temporary basis a bailout worth €1.8 billion for the Popular Bank.