# EUR-Lex - 52013PC0602 - EN

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# 52013PC0602

**Proposal for a COUNCIL IMPLEMENTING DECISION on approving the macroeconomic adjustment programme for Cyprus and repealing Council Decision 2013/236/EU /* COM/2013/0602 final - 2013/0290 (NLE) */**

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EXPLANATORY
MEMORANDUM

On 25 June 2012 Cyprus submitted a request
for financial assistance from the European Stability Mechanism (ESM). On 25
April 2013 the Council decided (Council Decision 2013/236/EU) that Cyprus shall rigorously implement a macroeconomic adjustment programme, which shall address the
specific risks emanating from Cyprus for the financial stability of the euro
area and shall aim to rapidly re-establish a sound and sustainable economic and
financial situation in Cyprus.

On 24 April 2013 the ESM Board of Governors
decided to grant, in principle, stability support to Cyprus and approved the
Memorandum of Understanding on Specific Economic Policy Conditionality
(hereinafter referred to as the "MoU") and its signing by the
Commission on behalf of the ESM. On 8 May 2013 the ESM Board of Directors
approved the financial assistance facility agreement.

The macroeconomic adjustment programme aims
at restoring financial market confidence, re-establishing sound macroeconomic
balances and enabling the economy to return to sustainable growth. To achieve
these goals, the programme builds on three pillars. The first pillar is a financial sector strategy based on restructuring and downsizing of
its financial institutions and strengthening its supervision, with efforts to
address capital and liquidity shortfalls. The second
pillar is an ambitious fiscal consolidation strategy, building on the
consolidation efforts initiated in 2012, in particular through measures to
reduce current primary expenditure, enhance government revenues, improve the
functioning of the public sector and maintain fiscal consolidation in the
medium-term. The aim is to correct the excessive general government deficit and
put the gross public debt-to-GDP ratio on a firm downward path in the medium
term. The authorities are committed to reducing the
deficit to below 3% of GDP by 2016. The good implementation of Structural and
other EU Funds, as well as EU policy initiatives aimed at enhancing jobs and
growth should be preserved. This will contribute to the long-term growth path
for Cyprus. The third pillar consists of an ambitious
structural reform agenda, with a view to supporting competitiveness and
sustainable and balanced growth, in line with country-specific recommendations
addressed to Cyprus in 2012, and allowing for the unwinding of macroeconomic
imbalances. Recalling the Council Recommendation of 22
April 2013 on establishing a Youth Guarantee[1],
opportunities for young people and their employability prospects should be enhanced.

The 3-year programme covers the period from
mid-2013 to mid-2016.

In line with
Article 1(2) of Decision 2013/236/EU, the Commission, in liaison with the ECB,
and, where appropriate, with the IMF, has conducted the first review to assess
the progress on the implementation of the agreed measures as well as their
effectiveness and economic and social impact. As a result the MoU has been
updated in the areas of financial sector reform, fiscal policy and structural
reforms. For the financial sector, the revised MoU includes agreement on
publishing a roadmap for the gradual relaxation of capital controls, based on
milestones and consistent with the banks' liquidity situation. Moreover, the
revised MoU requires establishing the legal framework for a new governance structure
to manage the stake of the State in the cooperative credit sector. Finally, an action
plan on customer due diligence and entity transparency has been agreed as part
of Cyprus' anti-money laundering efforts. With regard to fiscal policy, the revised
MoU contains a commitment to adopt a compensation scheme for provident fund and
retirement funds in the Cyprus Popular Bank, which should ensure comparable
treatment with such funds in the Bank of Cyprus. Also, it is established that in
order to ensure the effective implementation of EU funds, the Cypriot
authorities should ensure that the necessary national funds remain available to
cover national contributions. Finally, in line with Regulation (EU) No 472/2013,
the revised MoU requires Cyprus to submit a request for technical assistance for
the programme period and undertake a comprehensive audit of its public
finances. In the area of structural reforms, the revised MoU details the planned
reform of public assistance, which should ensure that social assistance serves
as a safety net to ensure a minimum income for those unable to support the
basic standard of living, while safeguarding incentives to take up work.
Moreover, it is required that Cyprus prepares detailed policy proposals with
regard to addressing shortcomings in its activation policies and that Cyprus takes
swift action to create opportunities for young people and improve their
employability prospects, in line with the objectives of the Council
Recommendation on Establishing a Youth Guarantee.

Following the entry into force of
Regulation (EU) No 472/2013, the macroeconomic adjustment programme is now to
be adopted in the form of a Council implementing decision. For reasons of legal
clarity and certainty, the Commission therefore proposes to readopt the
programme on the basis of Article 7(2) of Regulation (EU) No 472/2013. The
substance of the programme is in essence identical to the one approved by
Council Decision 2013/236/EU, but also incorporates the results of the review
carried out in accordance with Article 1(2) of Decision 2013/236/EU. At the
same time, it is proposed to repeal Council Decision 2013/236/EU.

The proposed decision will ensure full
consistency between the Union multilateral surveillance framework established
by the TFEU and the policy conditionality underpinning the economic adjustment programme.
Notably, Article 10 of Regulation (EU) No 472/2013 provides for consistency in reporting
and monitoring obligations.

2013/0290 (NLE)

Proposal for a

COUNCIL IMPLEMENTING DECISION

on approving the macroeconomic adjustment
programme for Cyprus and repealing Council Decision 2013/236/EU

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union,

Having regard to Regulation (EU) No
472/2013 of the European Parliament and of the Council of 21 May 2013 on the
strengthening of economic and budgetary surveillance of Member States in the
euro area experiencing or threatened with serious difficulties with respect to
their financial stability, and in particular Article 7(2) and (5) thereof,

Having regard to the proposal from the
European Commission,

Whereas:

(1)       Regulation (EU) No
472/2013 applies to Member States already in receipt of financial assistance,
including those from the ESM, at the time of its entry into force.

(2)       Regulation (EU) No
472/2013 sets the rules for the approval of macroeconomic adjustment programme
for Member States in receipt of financial assistance, which need to be consistent
with the provisions of the Treaty of Establishing the European Stability Mechanism
(ESM).

(3)       Upon a request of 25 June
2012 by Cyprus for financial assistance from the European Stability Mechanism
(ESM), the Council decided on 25 April 2013 (Council Decision 2013/236/EU) that
Cyprus shall rigorously implement a macroeconomic adjustment programme.

(4)       On 24 April 2013 the ESM
Board of Governors decided to grant, in principle, stability support to Cyprus and approved the Memorandum of Understanding on Specific Economic Policy
Conditionality (hereinafter referred to as the "MoU") and its signing
by the Commission on behalf of the ESM.

(5)       In line with Article 1(2)
of Council Decision 2013/236/EU, the Commission, in liaison with the ECB, and,
where appropriate, with the IMF, has conducted the first review to assess the
progress with the implementation of the agreed measures as well as their effectiveness
and economic and social impact. As a consequence of this review, an update was
made to the existing macro-economic adjustment programme, reflecting the steps taken
by the Cypriot authorities by the second quarter of 2013.

(6)       Following the entry into
force of Regulation (EU) No 472/2013, the macroeconomic adjustment programme is
now to be adopted in the form of a Council implementing decision. For reasons
of legal clarity and certainty, the programme should be readopted on the basis
of Article 7(2) of Regulation (EU) No 472/2013. The substance of the programme
should remain identical to the one approved by Council Decision 2013/236/EU,
but also incorporate the results of the review carried out in accordance with
Article 1(2) of Decision 2013/236/EU. At the same time, Council Decision
2013/236/EU should be repealed.

(7)       The Commission, in liaison
with the ECB and the IMF, has conducted the first review to assess the progress
on the implementation of the agreed measures as well as their effectiveness and
economic and social impact. As a result, the MoU has been updated in the areas
of financial sector reform, fiscal policy and structural reforms, notably with
regard to (i) a roadmap for the gradual relaxation of capital controls, (ii)
establishing the legal framework for a new governance structure to manage the
stake of the State in the cooperative credit sector, (iii) an anti-money
laundering action plan, (iv) a compensation scheme for provident fund and
retirement funds in the Cyprus Popular Bank, (v) ensuring that the necessary
national funds remain available to cover national contributions for projects
funded by the Structural and other EU funds, (vi) providing details of the
planned reform of public assistance, and (vii) preparing detailed policy
proposals for activation policies and taking swift action to create
opportunities for young people and improve their employability prospects. The
implementation of comprehensive and ambitious reforms in financial, fiscal and
structural areas should safeguard the medium-term sustainability of the Cypriot
public debt.

(8)       Throughout the
implementation of Cyprus' comprehensive policy package, the Commission should
provide additional policy advice and technical assistance in specific areas. A Member State subject to a macroeconomic adjustment programme experiencing insufficient
administrative capacity shall seek technical assistance from the Commission,
which may constitute, for that purpose, groups of experts.

(9)       The Cypriot authorities shall
seek the view, in accordance with current national rules and practises, of social
partners and civil society organisations in the preparation, implementation,
monitoring and evaluation of the macroeconomic adjustment programme,

HAS ADOPTED THIS DECISION:

Article 1

1.           In order to facilitate the
return of the Cypriot economy to a path of sustainable growth and to fiscal and
financial stability, Cyprus shall rigorously implement a macroeconomic
adjustment programme (the "programme"), the main elements of which
are laid down in Article 2 of this Decision. The programme shall address the
specific risks emanating from Cyprus for the financial stability of the euro
area and shall aim to rapidly re‑establish a sound and sustainable
economic and financial situation in Cyprus and restore its capacity to finance
itself fully on the international financial markets. The programme shall take
due account of the Council recommendations addressed to Cyprus under Articles 121,
126, 136 and 148 TFEU as well as Cyprus' actions to comply with them, while
aiming to broaden, strengthen and deepen the policy measures required.

2.           The Commission, in liaison
with the ECB and, where appropriate, with the IMF, shall monitor Cyprus' progress in implementing its programme. Cyprus shall give the Commission and the
ECB its full cooperation. It shall, in particular, provide them with all the
information that they deem necessary for the monitoring of the programme. The
Cypriot authorities shall consult ex-ante with the Commission, the ECB and the
IMF on the adoption of policies that are not included in this Implementing
Decision but that could have a material impact on the achievement of programme
objectives.

3.           The Commission, in liaison
with the ECB and, where appropriate, with the IMF, shall examine with the
Cypriot authorities any changes and updates to the programme that may be needed
in order to take proper account of, inter alia, any significant gap between
macroeconomic and fiscal forecasts and realised figures (including employment),
negative spill‑over effects, as well as macroeconomic and financial
shocks.

In order to ensure the smooth implementation of
the programme and to help the correction of imbalances in a sustainable way,
the Commission shall ensure the provision of continued advice and guidance on
fiscal, financial market and structural reforms.

The Commission shall at regular intervals
assess the economic impact of the programme and shall recommend necessary
corrections with a view to enhancing growth and job creation, securing the
necessary fiscal consolidation, and minimising harmful social impacts. In this
context, the macroeconomic adjustment programme, including its objectives and
the expected distribution of the adjustment effort, shall be made public.

Article 2

1.           The key objectives of the
programme shall be: to restore the soundness of the Cypriot banking sector; to
continue the on‑going process of fiscal consolidation; and to implement
structural reforms to support competitiveness and sustainable and balanced
growth.

2.           Cyprus shall pursue fiscal
consolidation consistent with its obligations under the excessive deficit
procedure by means of high‑quality permanent measures while minimising
the impact on vulnerable groups.

3.           In order to bring its
deficit below 3% of GDP by 2016, Cyprus shall stand ready to take additional
consolidation measures. Specifically, in the event of underperformance of
revenue or higher social spending needs due to adverse macroeconomic effects,
the Cypriot Government shall stand ready to take additional measures to
preserve the programme's objectives, including by reducing discretionary
spending, while minimising the impact on vulnerable groups. Over the programme
period, cash revenue above the programme projections, including any windfall
gains, shall be saved or used to reduce debt. Conversely, over‑performance,
to the extent that it is deemed permanent, can reduce the need for additional
measures in the outer years.

4.           Cyprus shall preserve the
good implementation of Structural and other EU Funds, in respect of the
programme's budgetary targets. In order to ensure the effective implementation
of EU funds, the Government will ensure that the necessary national funds
remain available to cover national contributions, including non-eligible
expenditure, under the European Structural and Investment Funds (ERDF, ESF,
Cohesion Fund, EAFRD and EFF/EMFF) in the framework of the 2007-2013 and
2014-20 programming periods, while taking into account available EIB funding. The
authorities shall ensure that the institutional capacity to implement current
and future programmes is improved and the appropriate human resources of
Managing Authorities and implementing bodies are available.

5.           With a view to restoring
the soundness of its financial sector, Cyprus shall continue to thoroughly
reform and restructure the banking sector and reinforce viable banks by
restoring their capital, addressing their liquidity situation and strengthening
their supervision. The programme shall provide for the following measures and
outcomes:

(a)     ensuring that the liquidity situation
of the banking sector shall be closely monitored. The temporary restrictions on
the free movement of capital (inter alia, limits on cash
withdrawals, payments and transfers) shall be closely
monitored. The goal is that controls shall remain in
place only for as long as is strictly necessary to mitigate serious risks for
the stability of the financial system. A roadmap for the controls' gradual
relaxation has been published, based on milestones and progress with the
programme implementation and consistent with the banks' liquidity situation. The medium‑term funding and capital plans of domestic banks relying on central bank funding or receiving state aid should
realistically reflect the anticipated deleveraging in the banking sector, and
reduce dependency on borrowing from the central banks, while avoiding asset
fire sales and a credit crunch. The regulations on the minimum liquidity requirements
shall be updated to prevent excessive issuer concentration in the future;

(b)     adopting the necessary regulatory
requirements regarding an increase in the minimum core Tier 1 capital adequacy
ratio to 9% by the end of 2013;

(c)     taking steps to minimise the cost to
taxpayers of bank restructuring. Undercapitalised commercial and cooperative
credit institutions shall raise, to the largest extent possible, capital from
private sources before State aid measures are granted. Any restructuring plans
shall be formally approved under State aid rules, before such State aid is
provided. Commercial banks with a capital shortfall may, if other measures do
not suffice, ask for recapitalisation aid from the State in line with State aid
procedures;

(d)     ensuring that a credit register is
created, that the current regulatory framework on loan origination and
management processes is reviewed and amended, if necessary, and that
legislation strengthening the governance of commercial banks is adopted;

(e)     strengthening banks' governance,
including by prohibiting lending to independent board members or their
connected parties;

(f)      maximising recovery for non‑performing
loans, while minimising incentives for strategic default by borrowers. This
shall include easing constraints on the seizure of collateral and proper
monitoring and managing of non‑performing loans;

(g)     completing the harmonisation of the
regulation and supervision of cooperative credit institutions with those of
commercial banks;

(h)     implementing the strategy for the
future structure, functioning and viability of the cooperative credit
institution sector, as designed by the Central Bank of Cyprus in consultation
with the Commission, the ECB and the IMF;

(i)      enhancing the monitoring of the
indebtedness of the corporate and household sectors and establishing a
framework for targeted private sector debt restructuring to facilitate new
lending and diminish credit constraints;

(j)      further strengthening the anti‑money
laundering framework and implementing an action plan ensuring
the implementation of improved practices with regard to customer due diligence
and entity transparency, in line with best practice;

(k)     submitting legislation for mandatory
supervision based on capitalisation levels;

(l)      integrating stress‑testing into
regular off‑site bank supervision;

(m)    introducing mandatory disclosure
requirements to ensure that banks regularly communicate to markets progress in
restructuring their operations; and

(n)     establishing the legal framework for a
new governance structure to manage the stake of the State in the cooperative
credit sector.

6.           Over 2013, the Cypriot
authorities shall rigorously implement the 2013 Budget Law (as amended),
including the additional permanent measures adopted prior to the granting of
the first disbursement of financial assistance, which should amount to at least
EUR 351 million (2.1% of GDP). Cyprus shall adopt the following measures:

(a)     a reform of its tax system for motor
vehicles, based on environmentally‑friendly principles and with a view to
raising additional revenue in the medium term; and

(b)     a compensation scheme for provident
and retirement funds in Cyprus Popular Bank, which should ensure comparable
treatment with such funds in the Bank of Cyprus, should take into account the cash-flow
and actuarial position of each fund and should minimise the impact on the
general government deficit. Given the social welfare nature of such funds, the
2013 general government deficit target may be revised to incorporate the budgetary
impact of this scheme;

(c)     full implementation of the
consolidation measures adopted since December 2012.

7.           The following measures
shall be applied by Cyprus as of 1 January 2014:

(a)     on the expenditure side, the budget
shall include: a reduction in total outlays for social transfers through better
targeting; a further reduction in the public and broader public sector wages
and overtime compensation; the introduction of a fee on public transport cards
for students and pensioners; and structural reform measures in the educational
sector to improve the use of resources; and

(b)     on the revenue side, the budget for 2014
shall include: an extension of the temporary contribution on gross earnings of
public and private sector employees up to 31 December 2016; increases in VAT;
increases in excise duties; and an increase in the contributions to the General
Social Insurance Scheme.

8.           In order to ensure the
long‑term sustainability of public finances, Cyprus shall implement
fiscal‑structural reforms, comprising, inter alia, the following measures
and outcomes:

(a)     if necessary, further reforms of the
general and public sector pension system to ensure the long-run viability of the
pension system, while addressing the adequacy of pensions. Reform options shall
be provided by an actuarial study;

(b)     control of the growth of health
expenditure in order to ensure sufficient means for fundamental health care by strengthening
the sustainability of the funding structure and the efficiency of public
healthcare provision; implement a National Health System, ensuring its
financial sustainability while providing universal coverage;

(c)     improvement in the efficiency of
public spending and the budgetary process by means of an effective medium‑term
budgetary framework as part of an improved public finance management, hereby contributing
to the budgetary consolidation efforts taking into account the need to ensure
sufficient means for fundamental policies, such as education and health care.
This framework shall be fully compliant with the Council Directive of 8 November
2011 on requirements for budgetary frameworks of the Member States[2] and the Treaty on Stability,
Coordination and Governance in the Economic and Monetary Union, signed in Brussels on 2 March 2012;

(d)     adoption of an adequate legal and
institutional framework for Public Private Partnerships designed according to
best practice;

(e)     elaboration of a programme to achieve
a solid corporate governance system for state‑owned and semi‑public
enterprises and initiation of a privatisation plan to help improve economic
efficiency and restore debt sustainability;

(f)      elaboration and implementation of a
comprehensive reform plan to improve the effectiveness and efficiency of tax
collection and administration, including measures to fight against tax fraud
and evasion and safeguard the full and timely application of laws and standards
governing international tax cooperation and the exchange of tax information;

(g)     reform of the immovable property tax
regime;

(h)     reform of the public administration to
improve its functioning and cost‑effectiveness, in particular by
reviewing the size, employment conditions and functional organisation of the
public service in order to ensure the efficient use of government resources and
the provision of a quality service to the population;

(i)      reforms of the overall structure and
the levels of welfare benefits, with the aim of producing an efficient use of
resources and ensuring an appropriate balance between welfare assistance and
incentives to take up work. The planned reform of public assistance shall
ensure that social assistance serves as a safety net to ensure a minimum income
for those unable to support the basic standard of living, while safeguarding
incentives to take up work; and

(j)      undertaking a comprehensive audit of
its public finances in order, inter alia, to assess the reasons that led to the
building up of excessive levels of debt.

9.           Cyprus shall ensure that
the suspension of wage indexation in the wider public sector remains in place
until the end of the programme. Any change in the minimum wage shall be in line
with the economic and labour market developments, and shall be adopted after
consultation with the social partners.

10.         Cyprus shall prepare
detailed policy proposals with regard to addressing identified shortcomings in
its activation policies. Cyprus shall take swift action to create opportunities
for young people and improve their employability prospects, in line with the
objectives of the Council Recommendation on Establishing a Youth Guarantee. The
design, management and implementation of the measures targeted to youth shall
be well integrated within the broader system of activation policies and be
coherent with the reform of the social welfare system and the agreed budgetary
targets.

11.         Cyprus shall adopt any
remaining necessary amendments to sector-specific legislation required in order
to fully implement Directive 2006/123/EC of the European Parliament and of the
Council on services in the internal market[3].
Unjustified obstacles in the services markets, in particular in relation to
regulated professions, shall be eliminated. The competition framework shall be
improved by enhancing the functioning of the competent competition authority
and by reinforcing the independence and powers of the national regulatory
authorities.

12.         Cyprus shall ensure a reduction
in the title deed issuance backlog, shall take action to accelerate the swift
clearing of encumbrances on title deeds to be transferred to purchases of
immovable property, and shall implement guaranteed timeframes for the issuance
of building certificates and title deeds.

13.         Cyprus shall amend the
rules on the forced sale of mortgaged property and shall allow for private
auctions within the shortest feasible timespan. The pace of court case handling
shall be improved and court backlogs shall be eliminated by the end of the
programme. Cyprus shall take initiatives to strengthen the competitiveness of
its tourism sector, by providing a concrete action plan leading to the
implementation of the quantified targets identified, inter alia in the recently
revised Tourism Strategy for 2011‑2015. Cyprus shall report on air
connectivity needs as the basis for an aeropolitical strategy.

14.         In the energy sector, Cyprus shall fully implement the Third Energy Package, notwithstanding Article 44.2 of the
Electricity Directive and Article 49.1 of the Gas Directive. Cyprus shall consider whether to make use of the derogations provided to it in the
aforementioned articles. In parallel, a comprehensive development plan for the
rearrangement of the Cypriot energy sector shall be formulated. That plan shall
encompass:

(a)     a roll‑out plan for the
infrastructure required for the exploitation of gas, taking into account
commercial options and risks;

(b)     a comprehensive outline of the
regulatory regime and market organisation for the restructured energy sector
and gas exports, including for a licensing and tax regime that maximises
revenues; and

(c)     a plan to establish the institutional
framework for the management of hydrocarbon resources, including a resource
fund, which should receive and manage public revenue from offshore gas
exploitation and which is set up on the basis of internationally‑recognised
best practice.

15.         Cyprus shall submit a request
to the European Commission for technical assistance during the programme period.
The request shall identify and specify the areas of technical assistance or
advisory services which the Cypriot authorities consider essential for the
implementation of its macroeconomic adjustment programme.

Article 3

Council Decision 2013/236/EU is repealed.

Article 4

This Decision is addressed to the Republic of Cyprus.

Done at Brussels,

For
the Council

The
President

[1]               OJ C 120, 26.4.2013, p. 1.

[2]               OJ L 306, 23.11.2011, p. 41.

[3]               OJ L 376, 27.12.2006,
p. 36.