# EUR-Lex - 52014PC0541 - EN

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# 52014PC0541

**Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2013/463/EU on approving the macroeconomic adjustment programme for Cyprus /* COM/2014/0541 final - 2014/0248 (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 fifth 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 provides that the
authorities will consider further liberalisation of the external restrictive
measures only after the successful completion of the Comprehensive Assessement
and a smooth transition to the Single Supervisory Mechanism (SSM). This liberalisation,
in timely consultation with the Commission, ECB and IMF and informing the ESM, will
be consistent with financial stability and comfortable liquidity buffers. The
revised MoU also provides for an updated plan for the gradual relaxation of
these restrictive measures. In addition, it requires further measures to
strenghten the banks' management of non-performing loans. It also includes a
provision aimed at concluding the follow-up on the 2013 audit regarding
individual financial institutions, imposing sanctions if applicable, and making
the final decision public. The revised MoU requires further measures to improve
the Cooperative Group's operational capacity. It also includes two prior
actions, namely the adoption by the Council of Ministers of the new
comprehensive framework establishing appropriate corporate and personal
insolvency procedures, as well as the adoption by the House of Representatives
of the amendments to the legal framework in relation to foreclosures of
mortgaged properties, while its specifies details on the required elements of
these two new frameworks. With regard to fiscal policy, the primary deficit
target for 2014 was revised down to no more than EUR 210 million (1.3% of GDP)
to reflect the fiscal performance in the first half of 2014. In addition, the revised
MoU requires the submission of a proposal ensuring the fiscal neutrality of the
welfare system reform and the achievement of the 2015 fiscal deficit target, while
the primary surplus target for 2017 has been revised down in order to smooth
the fiscal adjustment over 2017-2018. In the area of fiscal-structural and structural
reforms, the revised MoU sets further steps to operationalize the privatisation
process in the Cyprus Ports Authority (CPA) and the Electricity Authority of
Cyprus (EAC). On revenue administration and tax compliance, it requires the
appointment of the new Commissioner and the two Assistant Commissioners of the
new tax department, the establishment of a common taxpayer database, and the
adoption of necessary secondary legislation to make the enhanced collection
powers operational. The revised MoU also stipulates that the reform of the
immovable property taxation will be implemented in 2015. On the social welfare
reform, the revised MoU provides for the creation of a national registry of
benefits, on which basis the monitoring unit will produce an assessment report
of the welfare system reform to ensure its budget neutrality. On housing market
regulation, further requirements are included to fasten the issuance of title
deeds. In the area of tourism, articles of the current law on the Cyprus
Tourism Organisation potentially hampering competition will be assessed, while
in the area of energy, a preliminary assessment of the technical and economic
potential for further increasing electricity production by renewable energy
sources and of the cost price of different sources of
renewables compared to conventional primary energy sources will be carried out. The revised MoU also requires the authorities to
envisage measures to improve the capacity and independence of the Energy Regulatory
Authority (CERA).

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 472/2013.
The substance of the programme is in essence identical to the one approved by
Council Decision 2013/236, but also incorporates the results of the review
carried out in accordance with Article 1 (2) of Decision 2013/236. 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 Treaty of the Functioning of the European Union (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.

2014/0248 (NLE)

Proposal for a

COUNCIL IMPLEMENTING DECISION

amending Implementing Decision 2013/463/EU
on approving the macroeconomic adjustment programme for Cyprus

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[2],
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 European Stability Mechanism (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 ESM, the Council decided on 25
April 2013 by Decision 2013/236/EU[3]that
  Cyprus was to 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 and its signing by the Commission on behalf of the ESM.

(5)       In accordance with Article
1(2) of Council Decision 2013/236/EU, the Commission, in liaison with the European
Central Bank (ECB), and, where appropriate, with the International Monetary
Fund (IMF), has conducted the fifth 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 2014.

(6)       Following the entry into
force of Regulation (EU) No 472/2013, the macroeconomic adjustment programme was
adopted in the form of a Council Implementing Decision[4]. For reasons of legal
clarity and certainty, the programme was readopted on the basis of Article 7
(2) of Regulation 472/2013. The substance of the programme remained identical
to the one approved by Council Decision 2013/236/EU, but also incorporated 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 was repealed.

(7)       Council Implementing
Decision 2013/463/EU was already amended by Decision 2014/169/EU.
In light of the latest developments, it should be
amended again.

(8)       The Commission, in liaison
with the ECB and the IMF, has conducted the fifth 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, changes should be made in the areas of
financial sector reform, fiscal policy and structural reforms, in particular with
regard to: (i) providing an updated plan for the gradual relaxation of external
restrictions, which the authorities commit to only start after the successful
completion of the Comprehensive Assessement and a smooth transition to the Single
Supervisory Mechanism (SSM); (ii) further measures to strenghten the banks'
management of non-performing loans; (iii) a requirement to conclude the
follow-up on the 2013 audit regarding individual financial institutions, impose
sanctions if applicable, and make the final decision public; (iv) the provision
of further measures to improve the Cooperative Group's operational capacity; (v)
the adoption by the Council of Ministers of the new comprehensive framework
establishing appropriate corporate and personal insolvency procedures, as well
as the adoption by the House of Representatives of the amendments to the legal
framework in relation to foreclosures of mortgaged properties (these are two
prior actions), with details on the required elements of these two new
frameworks; (vi) a revision of the 2014 primary deficit target to no more than EUR
210 million (1.3% of GDP) to reflect the fiscal performance in the first half
of 2014, the submission of a proposal ensuring the fiscal neutrality of the
welfare system reform and the achievement of the 2015 fiscal deficit target,
while the primary surplus target for 2017 has been revised down to 2.5% of GDP in
order to smooth the fiscal adjustment over 2017-2018; (vii) the setting of
further steps to operationalize the privatisation process in the Cyprus Ports Authority
and the Electricity Authority of Cyprus; (viii) the appointment of the new
Commissioners and the two Assistant Commissioners of the new tax department,
the establishment of a common taxpayer database, and the adoption of necessary
regulations to make the enhanced collection powers operational; (ix) the reform
of the immovable property taxation to be implemented in 2015; (x) the inclusion
of further requirements to fasten the issuance of title deeds on housing market
regulation; (xi) providing a draft action plan for the elimination of court
backlogs, detailed statistics on backlogs and duration of proceedings, as well
as establishing an administrative Court; (xii) the assessment of articles in
the current law of the Cyprus Tourism Organisation that may hamper competition;
and (xiii) a preliminary assessment of the technical and economic potential for
further increasing electricity production by renewable energy sources and of
the cost price of different sources of renewables
compared to conventional primary energy sources,
together with the inclusion of measures to improve the capacity and
independence of CERA.

(9)       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 is to seek technical assistance from the Commission,
which may constitute, for that purpose, groups of experts.

(10)     The Cypriot authorities should
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

Article 2 of Implementing Decision
2013/463/EU is amended as follows:

(1)        Paragraph 5 is replaced by the
following:

'5.      With a view to restoring the soundness
of its financial sector, Cyprus shall (i) continue to implement the
restructuring of the banking and cooperative credit institution sectors, (ii)
continue to strengthen the supervision and regulation in the context of the
ongoing transition to the SSM, (iii) undertake a reform of the debt
restructuring framework, and (iv) gradually remove restrictive measures in line
with its roadmap, while safeguarding financial stability. 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 gradual
relaxation of the external restrictive measures shall be consistent with
financial sector stability and preserves comfortable liquidity buffers. The
Cyprus Central Bank (CBC) will conduct on-site inspections of the
implementation of the restrictions, and take appropriate supervisory actions,
as needed. Further liberalisation of external restrictive measures will only be
considered by the authorities after the successful completion of the
Comprehensive Assessment and a smooth transition to the SSM. 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. After the result of the Comprehensive Assessment, the roadmap
for the gradual relaxation of restrictive measures will be updated and published.
The funding and capital plans of domestic banks relying on central bank funding or receiving state aid shall 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;

(b) 
adapting the minimum capital requirements,
taking into account the parameters of the balance sheet assessment and the
EU-wide stress test;

(c) 
ensuring that any restructuring plans shall be
formally approved under State aid rules, before any State aid is provided. Banks
with a capital shortfall may, if other measures do not suffice, ask for
recapitalisation aid from the State in accordance with State
aid procedures. Banks with restructuring plans shall report the progress
in their implementation of the plans;

(d) 
 ensuring that the credit register is created
and operational;

(e) 
taking into account the transition to the SSM,
ensuring the full implementation of the regulatory framework with respect to
loan origination, asset impairment and provisioning;

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

(g) 
ensuring the revision of the governance
directive, which will specify, among others, the interaction between banks'
internal audit units and bank supervisors;

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

(i) 
ensuring the necessary staff and amendments in
light of the new responsibility taken on by the CBC, including by ensuring a
separation between resolution and supervisory functions, the transposition into
national law of the Single Rulebook, including the Bank Recovery and Resolution
Directive and the Deposit Guarantee Scheme Directive;

(j) 
strengthening the management of non-performing
loans, taking into account the developments and timelines of the SSM. This notably
includes:  a revision of the Code of Conduct and of bank's arrears management
policies and practices;  the monitoring  restructuring targets set by the CBC;
measures to allow lenders to obtain adequate financial information on the
financial situation of borrowers, and to file for, obtain, and realise an
attachement of financial assets and earnings of dilinquent borrowers;  measures
to allow and facilitate the transfer by lenders to third parties of existing
individual loans, togheter with all collateral and securities, without having
to obtain the consent of the borrower;

(k) 
easing constraints on the seizure of collateral.
This shall accompany the preparation of legislation on the basis of a
comprehensive reform framework establishing appropriate corporate and personal
insolvency procedures, as well as ensuring the smooth and effective functioning
of the revised foreclosure and insolvency frameworks. In addition, once
reformed, the new private sector debt restructuring legal framework shall be
reviewed and additional measures shall be defined as needed;

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

(m) 
ensuring the Cooperative Group provides for
timely and complete implementation of the agreed restructuring plan and take
further measures to improve its operational capacity notably in the areas of
arrears management, Management Information System, governance, and management
capacity;

(n) 
continuing to further strengthen the anti‐money
laundering framework and implementing an action plan ensuring
the application of improved practices with regard to customer due diligence and
entity transparency, in line with best practice, integrating
stress‐testing into regular off‐site bank supervision.'

(2)        In Paragraph 8, point (e) is
replaced by the following:

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

(3)        Paragraph 13 is replaced by the
following:

'13.    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 implementing the concrete action plan leading to the attainment
of the quantified targets identified, inter alia in the recently revised Tourism
Strategy for 2011‐2015, and by amending the Cyprus Tourism Organisation Law,
namely those articles that that may hamper competition in the tourism sector.
Cyprus shall implement an aero-political strategy leading to the adaptation of
Cyprus' external aviation policy, taking into account the EU external aviation
and the EU aviation agreements, while ensuring sufficient air connectivity.'

(4)        In paragraph 14, point (b) is
replaced by the following:

'(b)    a comprehensive outline of the
regulatory regime and market organisation for the restructured energy and gas sector,
including a preliminary assessment of the potential for increasing electricity
production by renewable energy sources; and'

(5)        Paragraph 16 is replaced by the
following:

'16       When
developing a comprehensive and coherent growth strategy, Cyprus shall integrate
it into its national institutional framework leveraging on the on-going public
administration reform, the public financial management reform, other
commitments in Cyprus' macroeconomic adjustment programme and relevant EU
initiatives taking into account the Partnership Agreement for the
implementation of the European Structural and Investment Funds. The growth
strategy will be developed, coordinated and enforced through the single body
that will evolve out of the Task Force for Growth already established and will
be anchored in the national institutional framework.'

Article 2

This Decision is addressed to the Republic of Cyprus.

Done at Brussels, [...]

For
the Council

The
President
                                                                       [...]

[1]               OJ C 120, 26.04.2013, p. 1

[2]               OJ L 140, 27.5.2013, p. 1

[3]               Council Decision 2013/236/EU of 25 April 2013
addressed to Cyprus on specific measures to restore financial stability and
sustainable growth (OJ L 141, 28.5.2013, p. 32)

[4]               Council Implementing Decision
2013/463/EU of 13 September 2013 on approving the macroeconomic adjustment
programme for Cyprus and repealing Decision 2013/236/EU (OJ L 250, 20.9.2013,
p. 40)