Opinion of the European Central Bank of 1 October 2009 on the issuance of special government bonds to credit institutions (CON/2009/78)
Date: 2009-10-01
Institutions: European Central Bank
Subjects: Cyprus, bond, credit institution, financial stability, money-market liquidity, national law, public borrowing

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 issuance 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 indents 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 provisions1, 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 sentence 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 government bonds to be used as collateral by eligible 

credit  institutions  ‘for  obtaining  liquidity  from  the  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  
2  

3  

OJ L 189, 3.7.1998, p. 42.  
Article 5(4) of the draft decree provides that ‘The credit institutions that are allocated the special government bonds shall 
use  the  said  bonds  only  as  collateral  for  obtaining  liquidity  from  the  European  Central  Bank  and/or  the  interbank 
market.’. 
Draft law, Article 4. 

 
 
 
 
 
                                                 
medium  enterprises  (SMEs)4,  thereby  indirectly  contributing  to  a  reduction  of  the  pressure  on 

lending interest rates. In order to safeguard the 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-member 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 conditions of their issuance and use6. 

1.2  Main features  

The draft law foresees the issuance and contractual allocation (effectively, the ‘lending’) to eligible 

credit institutions of zero coupon special government 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 adequate collateral to the Government of Cyprus11. At the 

expiry  of  the  contracts  entered  into  for  their  allocation,  the  special  government  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  payable  by  beneficiary  credit  institutions  to  the 
bonds’ issuer13; (ii) the collateral eligibility criteria (including 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. 

Draft law, Article 8(3); draft decree, Article 5(4). 
Draft decree, Article 6.  
Draft law, Article 14. 
Draft law, Articles 3 and 5; draft decree, Article 5.   
Draft law, Article 7; draft decree, Article 3(2). 
Draft law, Article 8(2); draft decree, Article 5(2). 
Draft law, Article 10; draft decree, Article 5(8). 

4  
5  
6  
7  
8  
9   
10  
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 the Supervision and Development of Cooperative Credit Societies, 
for the credit institutions supervised by them. 
Draft law, Article 8(1); draft decree, Article 5(3). 

12  
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). 

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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  their  actions  with  their  EU  partners  (inter  alia  with 

regard  to  the  end  of  nationally-devised  financial  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  institutions;  and  (iv)  recapitalising  distressed  banks18. 

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 financial markets should aim at implementing the above 

aims and principles, in a spirit of close cooperation 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  integration  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 for 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  

18  

19 
20 

See,  in  particular,  CON/2008/44  of  3  October  2008  at  the  request  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  Economic  Affairs  and  Finance  on  two  Decree-Laws  containing  urgent  measures  to 
guarantee the stability of the banking system and the continuity of the provision of credit; CON/2008/59 of 24 October 
2008  at  the  request  of  the  Swedish  Ministry  of  Finance  on  a  draft  proposal  on  stabilising  measures  for  the  Swedish 
financial  system;  CON/2008/65  of  12  November  2008  at  the  request  of  the  Banca  d’Italia  on  behalf  of  the  Italian 
Ministry for Economic Affairs and Finance on a draft ministerial 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.  
See  ‘Declaration  on  a  concerted  European  action  plan  of  the  euro  area  countries’,  available  on  the  former  French 
Presidency’s website at www.ue2008.fr.  
See notably ECB Opinions CON/2009/24, paragraph 3.1 and CON/2009/54, paragraph 2.5.2. 
See notably ECB Opinions CON/2009/24, paragraph 2.2 and CON/2009/62, paragraph 3.3. 

3 

                                                 
2.3  With these considerations in mind and against the background of the concrete guidance previously 

provided by the ECB and the EU institutions in this 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  access  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  required  by  the  European 

Commission in its guidance on the compliance of financial sector support schemes with State aid 
rules21. 

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 also 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  

22  

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  global  financial  crisis’  of  13  October  2008,  available  on  the 
Commission’s  website  at  www.ec.europa.eu.  Paragraph  18  thereof  specifies  that  ‘The  eligibility  criteria  of  financial 
institutions  …  must  be  objective,  taking  due  account  of  their  role  in  the  relevant  banking  system  and  the  overall 
economy, and non-discriminatory so as to avoid undue distortive effects on neighbouring markets and the internal market 
as a whole. In application of the principle of non discrimination 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’. 
Draft law, Article 9; draft decree, Article 5(7). 

4 

 
 
                                                 
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 institutions to the Cypriot government in return for the 

bonds allocated to them. The types of eligible collateral are listed in Article 5(9)(b)(i) to (iv). Under 

Article 5(9)(b)(i), collateral eligible in the Eurosystem for credit operations is also to be eligible as 

collateral for the allocation of the bonds. In the interests 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 credit 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 increase in total credit facilities to SMEs and households 

or to the total outstanding amount of such credit facilities 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  implementation.  Moreover,  the  draft  decree  provides  for  the 

participation of two CBC representatives in the special Committee foreseen in Article 6(1) thereof, 

with the task of monitoring the draft law’s implementation and ensuring that the liquidity secured 
by beneficiary credit institutions benefits domestic borrowers and the national economy at large23.  

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 institutions 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 functions 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), two representatives of the CBC (designated by the Governor of 
the  CBC  and  appointed  by  the  Minister  of  Finance)  and  two  representatives  of  the  Authority  for  the  Supervision  and 
Development of Cooperative Societies (designated by the Commissioner and appointed by the Minister). 

5 

 
 
 
                                                 
its  institutional  and  financial  independence  and  with  the  prohibition  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  definitions  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 decree 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. 

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