EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 1 October 2009 
on the issuance of special government bonds to credit institutions 
(CON/2009/78) 
 Introduction and legal basis
 
On 15 September 2009 the European Central Bank (ECB) received a request from the Cypriot Ministry of 
Finance for an opinion on (i) a draft law on the issu ance of special government bonds to credit institutions 
(hereinafter the ‘draft law’); and (ii) a draft decree of the Minister of Finance elaborating on and implementing the draft law (hereinafter the ‘draft decree’). 
The ECB’s competence to deliver an  opinion is based on Article 105(4) of the Treaty establishing the 
European Community and on the third and sixth indent s of Article 2(1) of Council Decision 98/415/EC of 
29 June 1998 on the consultation of the European Ce ntral Bank by national authorities regarding draft 
legislative provisions
1, as the draft law and draft decree relate to the Central Bank of Cyprus (CBC) and 
to rules applicable to financial institutions insofar as  they materially influence the stability of financial 
institutions and markets. In accordance with the first sen tence of Article 17.5 of the Rules of Procedure of 
the European Central Bank, the Governing Council has adopted this opinion. 
 1.  Purpose and main features of the draft law and draft decree 
1.1 Purpose   
 The stated purpose of the draft law and draft decree is to authorise and regulate the proposed 
issuance by the Minister of Finance of special govern ment bonds to be used as collateral by eligible 
credit institutions ‘for obtaining liquidity from th e European Central Bank and/or the interbank 
market’
2, with the aim of enhancing market liquidity  and reinforcing the national economy against 
the adverse effects of the global financial crisis3. In particular, eligible credit institutions to which 
the special government bonds have been allocated  are to come under an obligation to use the 
proceeds of the liquidity raised for the granting of credit to domestic households and small and 
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2  Article 5(4) of the draft decree provides that ‘The credit institutions that are allocated th e special government bonds shall  
use the said bonds only as collateral for obtaining liquidity from the European Central Bank and/or the interbank 
market.’. 
3  Draft law, Article 4. 
2 medium enterprises (SMEs)4, thereby indirectly contributing to a reduction of the pressure on 
lending interest rates. In order to safeguard th e proper implementation of the terms and conditions 
governing the issuance and use of the special government bonds, the draft law and draft decree 
foresee (i) the establishment of a special, six-memb er Committee, entrusted with monitoring tasks5; 
and (ii) the imposition of sanctions in cases of non- compliance by the beneficiaries of the special 
government bonds with the terms and co nditions of their issuance and use6. 
1.2 Main features   
 The draft law foresees the issuance and contractual a llocation (effectively, the ‘lending’) to eligible 
credit institutions of zero coupon special governme nt bonds, with a value of up to EUR 3 billion 
and a maturity of up to three years7. The offering of bonds to eligible credit institutions is to last for 
six months from the entry into force of the draft decree; this period can be extended subject to the 
approval of the European Commission8. The bonds in question, which are to be listed on the 
Cyprus Stock Exchange, are to be issued and allocated at nominal value, in packages of 
EUR 1 million9, against payment of a commission to the Ministry of Finance10 and provided that 
their prospective holders have assigned adequa te collateral to the Government of Cyprus11. At the 
expiry of the contracts entered into for their allocation, the special gove rnment bonds are to be 
returned by their holders and cancelled12. The draft law and draft decree also provide details on 
(i) the level of and pricing of the commission pa yable by beneficiary credit institutions to the 
bonds’ issuer13; (ii) the collateral eligibility criteria (incl uding the type of eligible collateral and the 
‘haircuts’ applicable to different types of collateral)14; (iii) the capital adequacy ratios that 
beneficiary credit institutions will need to maintain15; and (iv) the maximum amount of special 
government bonds to be allocated to each eligible beneficiary16. 
                                                 
4  Draft law, Article 8(3); draft decree, Article 5(4). 
5  Draft decree, Article 6.  
6  Draft law, Article 14. 
7  Draft law, Articles 3 and 5; draft decree, Article 5.   
8  Draft law, Article 7; draft decree, Article 3(2). 
9   Draft law, Article 8(2); draft decree, Article 5(2). 
10  Draft law, Article 10; draft decree, Article 5(8). 
11   Draft law, Article 11; draft decree, Article 5(9)(a). According to Article 5(10)(e) of the draft decree, the collateral in 
question is to be kept at the CBC or the Authority for th e Supervision and Development of Cooperative Credit Societies, 
for the credit institutions supervised by them. 
12  Draft law, Article 8(1); draft decree, Article 5(3). 
13     Draft law, Article 10; draft decree, Article 8. 
14     Draft decree, Articles 5(9) and (10). 
15     Draft law, Article 6; draft decree, Article 5(5). 
16   Draft law, Article 13; draft decree, Article 5(6). 
3 2. General observations 
2.1 The ECB draws the consulting authority’s attention to previous ECB opinions issued at the request 
of other Member States and, in particular, to its  comments on draft legislation sharing some of the 
features of the draft law and draft decree17.  
2.2 As already mentioned in previous opinions relating to national-level measures adopted in light of 
the financial turmoil, it is important that, regard  being had to (i) the similarities of the causes and 
consequences of the crisis in the Member States;  and (ii) the potential interdependencies of policy 
responses, national authorities coordinate th eir actions with their EU partners ( inter alia  with 
regard to the end of nationally-devised financia l crisis exit schemes). The ECB draws, in this 
regard, attention to the declaration of the euro  area summit in Paris of 12 October 2008, confirming 
the commitment of the euro area Heads of State to act decisively and in concert so as to restore 
confidence in financial markets and to help re- establish efficient financing conditions across the 
economy by means of (i) ensuring liquidity; (ii) facilitating the funding of banks; (iii) providing additional capital resources to financial institu tions; and (iv) recapitalising distressed banks
18. 
These aims and principles were also endorsed by the European Council on 15 and 16 October 
2008. Against this background, the ECB points out that initiatives put in place by national 
governments to restore confidence in the financia l markets should aim at implementing the above 
aims and principles, in a spirit of close cooperati on with other Member States, the EU institutions 
and the ECB. In particular, it is recalled that  harmonisation of the measures implemented at 
national level is essential to ensure the integrati on of financial markets within the EU and, in 
particular, within the euro area. The ECB also emphasises that coordination regarding the duration 
of national financial support schemes across the EU  is of crucial importance to ensure a level 
playing field19. In addition, the ECB recalls the need fo r national support measures to be temporary 
in nature.20 The ECB notes that the measures envisaged in  the draft law and draft decree are indeed 
temporary in nature, ensuring that the involvement  of the Cypriot State will be limited in time. 
                                                 
17  See, in particular, CON/2008/44 of 3 October 2008 at the requ est of the Irish Minister for Finance on a draft Credit 
Institutions (Financial Support) Bill 2008; 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; CON/2008/57 of 21 October 2008 at the request 
of the German Ministry of Finance on a Law on the implementation of a package of measures to stabilise the financial 
market and an order on its implementation; CON/2008/58 of 23  October 2008 at the request of the Banca d’Italia on 
behalf of the Italian Ministry for Ec onomic Affairs and Finance on two Decree -Laws containing urgent measures to 
guarantee the stability of the banking sy stem and the continuity of the provi sion of credit; CON/2008/59 of 24 October 
2008 at the request of the Swedish Ministry of Finance on a draft proposal on stabilisin g measures for the Swedish 
financial system; CON/2008/65 of 12 November 2008 at the reque st of the Banca d’Italia on behalf of the Italian 
Ministry for Economic Affairs and Finance on a draft minist erial decree containing provisions to implement Decree-Law 
No 157/2008 on further urgent measures to guarantee the stability of the credit system; CON/2008/79 of 27 November 
2008 at the request of the Greek Ministry of Economy and Finance on a draft law on enhancing liquidity of the economy 
to address the impact of the international financial crisis  and on a draft decision on its implementation; and CON/2009/12 
of 9 February 2009 on the terms and conditions for the grant of  State loans and guarantees in emergency situations. All 
ECB opinions are published on the ECB’ s website at www.ecb.europa.eu.  
18  See ‘Declaration on a concerted European action plan of th e euro area countries’, available on the former French 
Presidency’s website at www.ue2008.fr.  
19 See notably ECB Opinions CON/2009/24, para graph 3.1 and CON/2009/54, paragraph 2.5.2. 
20 See notably ECB Opinions CON/2009/24, para graph 2.2 and CON/2009/62, paragraph 3.3. 
4 2.3 With these considerations in mind and against the background of the concre te guidance previously 
provided by the ECB and the EU institutions in th is regard, the ECB has the following observations 
to make on the draft law and draft decree. 
3. Specific comments 3.1 Eligibility for support  
 The draft law and draft decree lay down a number of  eligibility criteria that credit institutions need 
to fulfil in order to have acc ess to the special government bonds  under consideration in this 
opinion. The ECB notes with satisfaction that the subsidiaries of foreign credit institutions are 
expressly included within the scope of eligible credit institutions, as requi red by the European 
Commission in its guidance on the compliance of fi nancial sector support schemes with State aid 
rules
21. 
3.2 The ECB also notes that the draft law and draft decree provide that the main criterion for the 
allocation of the bonds is to be the contribution of each eligible credit institution to the financing of 
domestic households and SMEs as at 31 December  2008, calculated on the basis of each credit 
institution’s ‘aggregate domestic market  share in business and housing loans’22. In the interests of 
clarity and legal certainty and with a view to ensuring equal treatment amongst financial 
institutions and avoiding market distortions, it is advisable that any element of discretion inherent 
in the allocation of special government bonds be removed from the draft law and draft decree and 
that any additional considerations of relevance to the determination of their allocation be explicitly 
mentioned in the draft legal acts. 
3.3 Calculation of commissions and pricing 
 The ECB notes that Article 5(8) of the draft decree specifies the commission to be charged upon 
allocation of the special government bonds. It al so notes that the specification of this commission 
recognises the ECB’s contribution to the harmonisation and coordination, across the EU, of the pricing of State guarantees. In particular, the ECB recalls that it is important to ensure that the 
pricing of such government schemes is risk-based, market-oriented and determined on the basis of 
the costs of a corresponding scheme in the market. In this respect, the ECB understands that this 
commission is calculated in such a way that all three conditions are fulfilled.  
                                                 
21  See the ‘Communication from the Commission – The application of State aid rules to measures taken in relation to 
financial institutions in the context of the current gl obal financial crisis’ of 13 October 2008, available on the 
Commission’s website at www.ec.europa.eu. Paragraph 18 thereof specifies that ‘The  eligibility criter ia of financial 
institutions … must be objective, taking due account of thei r role in the relevant banking system and the overall 
economy, and non-discriminatory so as to avoid undue distortive effects on neigh bouring markets and the internal market 
as a whole. In application of the principle of non discrimina tion on the grounds of nationality, all institutions incorporated 
in the Member State concerned, including subsidiaries, and with significant activities in that Member State should be 
covered by the scheme’. 
22  Draft law, Article 9; draft decree, Article 5(7). 
5 3.4 Haircuts 
 The ECB notes that Article 5(10) of the draft decree specifies the level of haircuts to be applied to 
collateral provided by the beneficiary credit institu tions to the Cypriot government in return for the 
bonds allocated to them. The types of eligible collate ral are listed in Article 5(9)(b)(i) to (iv). Under 
Article 5(9)(b)(i), collateral eligible in the Eurosyst em for credit operations is also to be eligible as 
collateral for the allocation of the bonds. In the inte rests of clarity, Article 5(9)(b)(i) could benefit 
from the specification of the haircuts applicable to  collateral eligible in the Eurosystem for credit 
operations when this is tendered by beneficiary cr edit institutions in consideration for the allocation 
of the bonds. 
3.5 Reporting obligations 
 Article 5(12) of the draft decree foresees quarterly reporting obligations for beneficiary credit 
institutions vis-à-vis the Ministry of Finance. The ECB notes that Article 5(12)(c) could benefit from clarification as to the conditions subject to which the ‘justification’ referred to in that 
provision is to be provided. In particular, it is unclear whether, in its current formulation, the 
reference made in that provision is to an incr ease in total credit facilities to SMEs and households 
or to the total outstanding amount of such credit f acilities and whether it is the former or the latter 
that should correspond to the amount of special government bonds allocated to each beneficiary credit institution. The ECB understands Article 5( 12)(c) to be consistent with the former 
interpretation.  
3.6 Role of the central bank 
 The ECB notes the CBC’s role in  the proposed issuance of the special government bonds under 
consideration in this opinion and in the monitoring of  their use. In particular, Article 3 of the draft 
law requires a recommendation of the Governor of the CBC prior to the adoption of any ministerial 
decrees determining the terms of its implementa tion. Moreover, the draft decree provides for the 
participation of two CBC representatives in the speci al Committee foreseen in Article 6(1) thereof, 
with the task of monitoring th e draft law’s implementation and ensuring that the liquidity secured 
by beneficiary credit institutions benefits dom estic borrowers and the national economy at large
23.  
3.7 In addition, the ECB notes that  the administrative penalties foreseen  in Article 14 of the draft law 
in cases of non-compliance by beneficiary credit ins titutions with the terms and conditions for the 
use of the special government bonds as well as the partial or total revocation of such bonds allocated to non-compliant beneficiary credit institutions, can only be imposed following a 
recommendation of the Governor of the CBC (or of the Commissioner, as the case may be).  
3.8 While appreciating the draft law’s recognition of the CBC’s expertise in its fields of competence, 
the ECB also expects that the CBC’s advisory func tions will be performed in full compliance with 
                                                 
23  The Committee, which is to be chaired by a representative of the Ministry of Finance, is to consist of two representatives 
of the Ministry of Finance (appointed by the Minister), tw o representatives of the CBC (designated by the Governor of 
the CBC and appointed by the Minister of Finance) and two representatives of the Author ity for the Supervision and 
Development of Cooperative Societ ies (designated by the Commissioner and appointed by the Minister). 
6 its institutional and financial i ndependence and with the prohibiti on on monetary financing laid 
down in Article 101(1) of the Treaty, read in conjunction with Council Regulation (EC) 
No 3603/93 of 13 December 1993 specifying defin itions for the application of the prohibitions 
referred to in Articles 104 and 104b(1) of the Treaty24. In this respect, the ECB welcomes the 
clarification of Article 6(3) of the draft decr ee which expressly provides that the establishment and 
operation of the Committee referred to in Article 6(1)  is to be without prejudice to the competences 
of the CBC (or of the Authority for the Supervision and Development of Cooperative Societies). 
 This opinion will be published on the ECB’s website.    Done at Frankfurt am Main, 1 October 2009. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET 
                                                 
24  OJ L 332, 31.12.1993, p. 1.