EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 9 February 2009 
at the request of the Cypriot Ministry of Finance on a draft law amending the Laws of 2002 and 
2004 on the management of revenues and expe nditure and on the accounting system of the 
Republic and other related matters 
(CON/2009/12) 
 
Introduction and legal basis On 16 January 2009, the European  Central Bank (ECB) received a request from the Cypriot Ministry 
of Finance for an opinion on a draft law amending the Laws of 2002 and 2004 on the management of 
revenues and expenditure and on the accounting sy stem of the Republic and other related matters
1 
(hereinafter the ‘draft law’). 
The ECB’s competence to deliver an opinion is based on Article 105(4) of the Treaty establishing the 
European Community and on the sixth indent of Article 2(1) of Council Decision 98/415/EC of 
29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft 
legislative provisions2, as the draft law relates to rules appli cable to financial institutions insofar as 
they materially influence the stability of financial in stitutions and markets. In accordance with the first 
sentence of Article 17.5 of the Rules of Procedur e of the European Central Bank, the Governing 
Council has adopted this opinion. 
 1. Purpose and main features of the draft law  
1.1  The draft law is motivated by the ongoing turbulence in the global financial markets and by the 
Cypriot authorities’ wish to place themselves in  a position where they can take any necessary 
measures to support financial in stitutions without delay, helping preserve confidence in the 
financial system. According to the explanator y memorandum accompanying the draft law, its 
purpose is to establish a framework to enable the Cypriot Ministerial Council, following a 
proposal of the Minister for Finance and taking into account the opinion of the Governor of the Central Bank of Cyprus (CBC), to take, ‘in a peri od of financial crisis’, now or in the future, 
measures intended to address liquidity or insolv ency problems affecting financial institutions 
based in Cyprus and to enhance their capital base  or balance sheets ‘under conditions that [the 
                                                     
 
1  Law 112(I)/2002, Official Gazette of the Republic No 3621, 12.7.2002, as amended (herei nafter the ‘basic law’). 
2  OJ L 189, 3.7.1998, p. 42.  
 
 
2 Ministerial Council] itself shall determine’, w ithout the need for any ratification of these 
measures by the House of Representatives. 
1.2 Under Section 2 of the draft law, which inser ts a new Section 30A into the basic law, the 
Ministerial Council could take any of the follo wing support measures in relation to troubled 
financial institutions: (i) a Government loan to  a financial institution; (ii) a Government 
guarantee to a financial institution; (iii) the recapita lisation of a financial institution in return for 
a corresponding participation in its ownership structure; (iv) the purchase of a financial 
institution’s assets; (v) a Government loan or gua rantee for an appropriate price and/or a grant 
paid to deposit-guarantee or investor protecti on schemes. As the draft law provides no more 
than the broad outline of what is to be a general Government support framework for the 
domestic financial system, the ECB understands th at the actual terms and conditions subject to 
which support measures are to be taken by the Ministerial Council will only be determined on 
an ad hoc basis and that the new Section 30A will be  activated without the adoption of any 
formal implementing measures involving Parliamentary assent3. The draft law, which does not 
provide for an expiry date for the powers conf erred on the Ministerial Council stipulates that, 
‘prior to the implementation of a scheme to support the financial sector, the provisions of the Laws on State aid control shall be complied with’
4. 
 2. General observations  2.1 The ECB has issued a number of opinions at  the request of the competent Member States’ 
authorities on national measures adopted in response to the global financial crisis
5. Given the 
broad scope of the support measures envisaged in the draft law and the fact that it may not have 
an opportunity to comment on any formal implem enting measures in the future, the ECB invites 
the consulting authority to take into account th e relevant observations made in its recent 
opinions on similar draft legislative provisions in other Member States, some of which are 
expressly repeated below. 
2.2 The ECB also draws attention to the guidance provided by the Ecofin Council to the Member 
States in the conclusions of its Meeting of 7 October 20086 as well as the Declaration issued by 
                                                      
3  The draft law nevertheless provides for th e submission by the competent Minister of ad hoc  and periodic reports to 
the House of Representatives, informi ng the House of any measures adopted in support of the domestic financial 
sector (see Section 2 of the draft law). 
4  Law 30(I)/2001, Official Gazette of the Republic No 3481, 16.3.2001, as amen ded. The Laws on State aid control 
transposed into the Cypriot legal order the acquis  in the area of State aid law, entrusting the Office of the 
Commissioner for State aid control with the task of monitoring its correct implementation in Cyprus. 
5  All ECB opinions are available on th e ECB’s website at www.ecb.europa.eu. 
6  See ‘Immediate Responses to Financial Turmoil’, Ecofin  Council Conclusions of 7 October 2008, available on the 
former French Presidency’s website at www.ue2008.fr. The Ecofin Council recommended that: (i) interventions 
should be timely and the support should in principle be temporary; (ii) the inte rests of taxpayers should be protected; 
(iii) existing shareholders should bear th e due consequences of the intervention;  (iv) the Government should be in a 
position to bring about a change of management; (v) mana gement should not retain undue benefits; (vi) governments 
 
 
3 the Heads of State of the euro area on 12 October 2008 (hereinafter the ‘Declaration’)7. In 
particular, the ECB stresses that any initia tives put in place by the competent national 
authorities to restore confidence in the financia l markets should be coordinated and should aim 
to implement the common principles in question, in a spirit of close cooperation with other Member States and the Community institutions. Th e principles contained in the Declaration as 
well as the conclusions raised by the Ecofin Council were endorsed by the European Council of 
15 to 16 October 2008
8. 
2.3 The ECB also stresses that it is of the utmost  importance that support operations conducted by 
the national authorities do not interfere with th e conduct of euro area monetary policy and/or 
with the Eurosystem’s refinancing operations9. Given the interdependencies of the Member 
States’ policy responses to the financial crisis, the ECB’s opinions have also drawn attention to 
the importance of a concerted approach througho ut the EU, aimed at restoring confidence in 
financial markets.  
2.4 With these general observations in mind, and ag ainst the background of the guidance previously 
given by the ECB and the Community institutions  in this regard, the ECB has the following 
observations to make on the draft law. 
  3.  Specific observations   
3.1 Scope, detailed rules and conditions for the activation of the national support measures  
3.1.1  The ECB notes that Section 2 of the dr aft law does not define any conditions, rules or 
limitations subject to which Government support measures are to be provided. Instead, these are 
to be determined on an ad hoc  basis if and when recourse is to be had to the Ministerial 
Council’s powers.  
3.1.2 In the light of the above, the ECB strongly recommends that the consulting authority clarifies 
the coverage of the proposed Government suppor t measures. It also draws attention to the 
importance of putting a transparent, predictable framework in place. This can only be done by 
defining expressly in the draft law both the te rms and conditions for domestic financial 
                                                                                                                                                                     
 
may have, inter alia , the power to intervene in remuneration; (vii) legitimate interests of competitors must be 
protected, in particular through the State aid rules; and (viii) negative sp ill-over effects should be avoided.  
7  The text of the Declaration is av ailable on the former French Presidency ’s website at www.ue2008.fr. The Member 
States agreed to: (i) ensure appropriate liquidity conditions for financial institutions: (ii)  facilitate the funding of 
banks; (iii) provide financial institutions with additional capi tal resources to continue to ensure the proper financing 
of the economy; (iv) allow for an efficient recapitalisation of  distressed banks, (v) ensure sufficient flexibility in the 
implementation of accounting rules; and (vi) enhance cooperation procedures am ong European countries. 
8   See Brussels European Council of 15 to 16 October, paragraph 3 of the Presidency Conclusions. 
9   See, for instance, paragraph 3.2 of ECB Opinion CON/ 2008/52 of 17 October 2008 at the request of the Spanish State 
Secretary for Economic Affairs on a Royal Decree-Law creati ng a Fund for the acquisition of financial assets and on 
a Royal Decree-Law adopting urgent financial and economic measures in relation to the concerted European action 
plan of the euro area countries  and paragraph 3.7 of ECB Opinion CON/ 2008/81 of 1 December 2008 at the request 
of the Hungarian Ministry of Finance on a draft la w on strengthening the financia l intermediary system.  
 
 
4 institutions to have recourse to such framework  in cases of emergency only, and the parameters 
of and limitations to the exercise by the Ministerial Council of its powers when deciding whether or not and subject to which c onditions to activate the new Section 30A
10. As regards the 
definition of ‘financial crisis’, the ECB unde rstands that financial difficulties faced by 
individual institutions qualify as a financial crisis under the draft law only when potential 
systemic disorders can be foreseen and would welcome a clarification in this respect. 
3.2  Selection of beneficiary institutions 
3.2.1 The ECB draws the consulting authority’s attention to the Declaration which states, inter alia , 
that Member States’ actions should ‘be designed in order to avoid any distortion in the level playing field’ and that ‘all the financial institu tions incorporated and operating in [euro area] 
countries and subsidiaries of foreign institutions w ith substantial operations  [should] be eligible’ 
to benefit from the actions in question. The ECB has previously stated that ‘arrangements that 
may be seen as providing preferential treatment to specified institutions should be avoided’
11. 
3.2.2 Pursuant to Article 2 of the draft law, its provisions are to apply to the ‘financial institutions’ 
listed in it, provided that these are licensed by the competent national authorities in Cyprus. The 
ECB understands that, with the exception of bran ches of banks and other financial institutions 
registered outside Cyprus, which are ineligible to  benefit, the draft law applies to all Cypriot 
financial institutions, including the Cyprus-based subsidiaries of foreign financial institutions. 
The ECB welcomes the non-discriminatory applicati on of the draft law, which is conducive to 
maintaining a level playing field in the treatment  of domestic and forei gn financial institutions 
in Cyprus. Moreover, the ECB notes that the draft law is, in that respect, also in line with the 
Commission’s guidance on the eligibility criteria for beneficiary institutions12. 
3.3 The proposed support measures and the si ngle monetary policy of the euro area 
3.3.1 In line with the Declaration, Member States have  to act in a coordinated manner to avoid the 
risk of significant national differences, apt to  create distortions in the European financial 
markets. The euro area Heads of  State also acknowledged the need to work in cooperation with 
the ECB to ensure consistency with the mana gement of liquidity by the Eurosystem and 
compatibility with the Eurosystem’s operational fra mework. In this respect, the ECB notes that 
uncoordinated decisions by Member States s hould be avoided as they may lead to a 
                                                      
10  In this regard see, for instance, paragraph 3.3 of E CB Opinion CON/2008/61 of 28 Octobe r 2008 at the request of the 
Belgian Minister for Finance on a draft royal decree  implementing the Law of 15 October 2008 on measures 
promoting financial stability and in particular establishing a State guarant ee for the provision of credit in the context 
of financial stability, in relation to the protection of deposits and life insurance and amending the Law of 
2 August 2002 on the supervision of the fi nancial sector and on financial servi ces, and paragraph 3.3 of ECB Opinion 
CON/2009/2 of 7 January  2009 at the request of the Latvian Ministry of Finance on a draft regulation establishing 
procedures for issue and supervision of bank loan guarantees. 
11  See paragraph 3.4 of ECB Opinion CON/ 2008/48 of 15 October 2008 at the request of the Irish Minister for Finance 
on a draft Credit Institutions (Financial Support) Scheme 2008. 
12  See Communication from the Commission,  - The Application of State Aid Rule s to Measures Taken in Relation to 
Financial Institutions in the context of the cu rrent global financial crisis,  paragraph 18. 
 
 
5 fragmentation of the euro area money market . Against this background, the ECB has the 
following specific remarks to make on the possible use, in the future, of the powers granted by 
the draft law. 
3.3.2 First, it follows from the new Section 30A that St ate guarantees may be issued to cover all types 
of liabilities of domestic financial institu tions and national guarantee schemes. The ECB 
therefore understands that the draft law does not exclude from its material scope of application, 
expressly or by implication, interbank deposits, subordinated or collateralised liabilities (such as 
covered bonds). The ECB repeats its view that  State guarantees should not cover interbank 
deposits, in particular, as this could: (i) enta il a substantial distortion in the various national 
segments of the euro area money market by potentially increasing short-term debt issuance activity across Member States, thus impairing the implementation of the single monetary policy which is an exclusive competence of the Euro system under Article 105(2) of the Treaty; and 
(ii)  affect the transmission of monetary policy decisions. The ECB recommends that the draft law be amended to expressly excl ude the abovementioned liabilities. 
3.3.3 Second, the ECB understands that the Cypriot Go vernment may issue State guarantees for loans 
taken out by banks. The ECB reminds the consultin g authority that the aims of arrangements for 
granting government guarantees of bank debt shoul d be to: (i) address the funding problems of 
liquidity-constrained solvent banks by improving th e functioning of the market for bank debt of 
longer term maturity; (ii) preserve the level- playing field amongst financial institutions and 
avoid market distortions and (iii) ensure consis tency with the management of liquidity by the 
CBC. In line with the Declaration, the ECB not es, moreover, that the euro area Governments 
should make available a Government guarantee of  new medium term (up to five years) bank 
senior debt issuance, which should be limited in  time. The ECB recommends that the draft law 
be amended to reflect the above. 
3.3.4 Third, regarding the pricing  of State guarantees, the ECB notes that, in the interests of ensuring 
a level-playing-field, it is crucial to ensure ha rmonisation of the price determination of such 
guarantees, both within the euro area and the EU. In  particular, it is important to ensure that the 
price of State guarantees is risk-based and market-o riented and that it is determined on the basis 
of the costs of a corresponding guarantee in the ma rket. In this regard, it is recalled that the 
Governing Council of the ECB has considered th e appropriate framework for the granting of 
government guarantees on bank debt issuance a nd agreed on some recommendations to which 
the attention of the consulting authority is drawn
13. 
3.3.5 Fourth, the ECB reminds the consulting authority that it is important to ensure that the 
beneficiary financial institutions do not profit fro m the undue use of their guaranteed status to 
engage in a heightened level of activities, distorting the market and facilitating abnormal 
                                                      
13  See the Recommendations of the Governing Council of the Eu ropean Central Bank on the pricing of State guarantees, 
issued on 20 November 2008, available on the ECB’s website at www.ecb.europa.eu   
 
 
6 balance sheet growth. In this regard, the ECB reiterates the importance of establishing 
appropriate safeguards such as limits on the marketi ng of financial products or on the expansion 
of their activities on the basis of State guaran tees. The ECB recommends that the draft law be 
amended to include such safeguards. 
3.3.6 Fifth, concerning the possible acquisition, under the draft law, of the assets of financial 
institutions by the Cypriot Government, the E CB has the following observations of relevance 
from a monetary policy perspective. Although su ch measures should have a positive impact in 
restoring confidence in the Cypriot banking system, it is important that the price applied for the acquisition of financial institutions’ assets by the Cypriot Government should be determined in 
a coordinated manner within the euro area a nd the EU so as not to interfere with the 
transmission of single monetary policy decisions. Th is remark also applies to the loans that the 
Cypriot Government may provide to fina ncial institutions under the draft law. 
3.3.7 Sixth, as noted above, the draft law is not expressed  to be a temporary measure, nor is there any 
indication in its text that any actual support measures adopted by the competent national authorities in Cyprus will be of limited duration.  The ECB recalls that so open-ended a scheme 
as the one envisaged under the draft law is not in line with the Declaration and should be 
avoided. In particular, the Declaration clearly draws attention to the need for any domestic 
support schemes to be temporary in nature, ev en if they can be extended or renewed
14. The ECB 
recommends that a provision on the temporary nature of the support measures is inserted in the draft law. 
3.4 Conditions for State capital investments within the euro area   
3.4.1 In line with the Declaration, the ECB reite rates that uncoordinated decisions amongst Member 
States should be avoided, as they may have a nega tive impact on the integr ity of the euro area 
and lead to significant differences in the treat ment of financial institutions across Member 
States. This remark also applies to meas ures related to State capital investments. 
3.4.2 The ECB takes the opportunity to restate the point s made in its previous opinions. In particular, 
the ECB draws the consulting authority’s attenti on to the specific recommendations made by the 
Governing Council of the ECB in the matter of recapitalisations
15. In this respect, the ECB notes 
that the aim of any recapitalisation measures should be to strengthen the capital position of fundamentally sound financial in stitutions in order to improve the functioning and stability of 
the banking system and to ensure the proper financing of the economy. In particular, a 
consistent approach should be used in defi ning the conditions for recapitalisations and the 
                                                     
 
14  ‘… In all cases, these actions will be designed in order to avoid any distortio n in the level playing field and possible 
abuse at the expense of non beneficiaries of these arrange ments. As a consequence the scheme will be limited in 
amount, temporary  (emphasis is ours) and will be applied under close scrutiny of financial authorities …’ 
(Declaration, supra  fn. 7).  Also see Communication from the Commission, supra  fn. 12, paragraph 24. 
15  Recommendations of the Governing Council of the European  Central Bank on the prici ng of recapitalisations of 
20 November 2008 (hereinafter the ‘Recommendations’), available on the ECB’s website at www.ecb.europa.eu. 
 
 
7 pricing of the instruments intended to provide Tier 1 capital to financial institutions. The ECB 
underlines the importance of appropr iate pricing for recapitalisations in terms of the goals of 
enhancing the stability of the financial system, facilitating a return to normal market conditions 
and ensuring the proper financing of the econom y. In its Recommendations, the ECB stresses 
that the pricing conditions for capital support should be risk-based and market-oriented, 
determined by taking into consideration the speci fic risk of both the specific instrument chosen 
for injecting capital and the institution concerned. Specific features of the instruments for capital 
injections (such as preference shares) should be a ppropriately chosen so that, while encouraging 
an early end to the State’s capital support of banks, they do not result in an excessive increase in 
the cost of capital. 
3.4.3 In line with the Declaration,  the ECB also emphasises that harmonisation regarding the expiry 
of national financial support schemes across the EU and in particular within the euro area is of 
crucial importance, including for State capital in vestments in financial institutions. In this 
context, it is important that the draft law shoul d expressly provide for the temporary nature of 
the Cypriot Government’s intervention. More ge nerally, concerning the issue of the application 
of State aid rules to measures taken by the Member States in connection with financial 
institutions in the context of the ongoing fina ncial crisis, the ECB draws the consulting 
authority’s attention to the importance of ensuri ng that the proposed arrangements comply with 
the relevant Community law provisions and with the criteria recently laid down by the Commission in its guidance on compliance by fina ncial sector support schemes with EU State 
aid rules
16 and to the need to ensure that the State’ s shareholder role as a result of a possible 
future recapitalisation under the draft law is lim ited in time. In this respect, and in accordance 
with the Recommendations, the Cypriot authoriti es should consider setting out terms for the 
redemption or conversion of the instruments eith er on the basis of a fixed period of time or 
depending on the development of market conditions, so as to preserve the temporary nature of 
the State’s involvement and discourage financial institutions from relying on such involvement 
for an extensive period of time. 
3.5  Central bank involvement in the support measures 
3.5.1 The ECB notes that, pursuant to Section 2 of th e draft law, the Ministry of Finance proposes to 
consult the Governor of the CBC prior to d eciding whether or not to support a domestic 
financial institution or to exercise any of the other powers conferred. While appreciating the 
draft law’s recognition of the CBC’s expertise in this field, the ECB al so expects the CBC’s 
involvement in the procedure not to extend be yond the provision of advice and otherwise to 
comply fully with the prohibition on monetary financing laid down in Article 101(1) of the 
Treaty, read in conjunction with Council Regul ation (EC) No 3603/93 of 13 December 1993 
                                                      
16  See, for instance, paragraph 3.8 of ECB Opinion C ON/2008/68 of 13 November 2008 at the request of the Finnish 
Ministry of Finance on a draft government proposal for laws amending the Law on the Government Guarantee Fund 
and the Law on credit institutions. 
 
 
8 specifying definitions for the application of the prohibitions referred to in Articles 104 and 
104b(1) of the Treaty17. In particular, the ECB expects that the support measures envisaged in 
the draft law will be exclusively financed from the State budget and that, to the extent that their funding may require State borrowing, this will not  include pre-financing or refinancing of the 
State budget by the CBC
18.  
3.5.2 The ECB also expects that the Council of Ministers will use its powers in connection with State 
support measures in a manner fully compatible with the CBC’s institutional and financial independence thereby safeguarding the proper pe rformance of the CBC’s tasks under the Treaty 
and the Statute of the European System of Ce ntral Banks and of the European Central Bank. 
The reference, in the new Section 30A to Secti on 6 of the Laws of 2002 to 2007 on the Central 
Bank of Cyprus is, in this respect, welcome.  
3.6  Funding of deposit-guarantee schemes  
The ECB notes that deposit-guarantee schemes have been included in the scope of application 
of the draft law. The ECB welcomes the inten tion to make available an emergency funding 
mechanism to ensure the effectiveness of de posit-guarantee schemes, an important element 
contributing to financial stability. However, it has reservations whether the emergency funding 
of a deposit-guarantee scheme shoul d be provided for via a discret ionary mechanism such as the 
one to be established under the draft law. The ECB understands, however, that the rules subject 
to which the Cypriot deposit-guarantee scheme ope rates are currently in the process of being 
amended and the ECB will comment further on the re levant aspects in due course, particularly 
concerning the funding of the Cypriot deposit-guarantee scheme. 
 This opinion will be published on the ECB’s website.  Done at Frankfurt am Main, 9 February 2009. 
[signed] 
The President of the ECB 
Jean-Claude TRICHET 
                                                     
 
17  OJ L 332, 31.12.1993, p.1. 
18  In this regard see, for instance, paragraph 3.3 of  ECB Opinion CON/2008/88 of 19 December 2008 at the request of 
the Slovenian Ministry of Finance on a draft decree laying down criteria and conditions fo r granting guarantees under 
Article 86.a of the Law on public finance, paragraph 3. 2.3 of ECB Opinion CON/2008/92 of 22 December 2008 at 
the request of the Slovenian Ministry of Finance on a dr aft decree laying down criteria and conditions for granting 
loans under Article 81.a of the Law on public finance and paragraph 3.2.3 of ECB Opinion CON/2009/3 of 
8 January 2009 at the request of the Slovenian Ministry  of Finance on a draft decree laying down criteria and 
conditions for the implementation of Stat e capital investments and for the conv ersion of State claims into capital 
shares under Article 81.a of the Law on public finance.