Conclusion of ESM programme for Cyprus:

an overview

31 March 2016

Cyprus’s clean exit possible thanks to strong commitment to reforms

1

■ Three years of extensive reforms and ESM/IMF support have delivered economic recovery

■ Financial sector was restructured, downsized and recapitalised

■ Macroeconomic imbalances were corrected, debt sustainability achieved

■ Market access was restored

0

2

4

6

8

10

12

14

16

18

2011 2012 2013 2014 2015 2016

60

65

70

75

80

85

90

95

100

105

110%

Confidence Indicator (EC) Gvt. Bond Yield 2020 (right hand scale)

Confidence Indicator: overall economic

sentiment derived from 5 indicators:

industry (weight 40%), services (weight

30%), consumer (20%), construction

(5%) and retail trade (5%). Source:

European Commission

Cyprus’s 2020 bond yield and confidence indicator

Source: European Commission, Bloomberg

The origins of Cyprus’s crisis

2

Source: ECB, Eurostat, ESM calculations

Oversized banking sectorFiscal imbalances

Source: European Commission

■ Rapid expansion of financial sector after EU accession (2004) and adoption of euro (2008)

■ Banking sector became oversized, with very poor lending practices, weak supervision, and

concentrated exposure to Greece

■ Macro and fiscal imbalances led to loss of market access

-6

-5

-4

-3

-2

-1

0

1

2

3

4

2004 2005 2006 2007 2008 2009 2010 2011 2012

40

45

50

55

60

65

70

75

80%%

Fiscal Balance Debt/GDP (right hand scale)

220

340

460

580

700

820

940

60

80

100

120

140

160

180

Dec

-05

Jun

-06

Dec

-06

Jun

-07

Dec

-07

Jun

-08

Dec

-08

Jun

-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12

Dec

-12

Jun

-13

Dec

-13

Jun

-14

Dec

-14

Jun

-15

%EUR billion

Total assetsTotal assets/GDP (right hand scale)Total assets/GDP - EA average (right hand scale)

Financial assistance

3

Cyprus financial assistance programme agreed by ESM and IMF in April/May 2013

Initial programme amount: up to €10 billion; €6.3 billion was disbursed by ESM and around

€1 billion by IMF

ESM loan disbursements from May 2013 to October 2015

6.31

2.7

ESM IMF Undisbursed funds

Breakdown of total financial assistance for Cyprus (€ billion)

Financial assistance

4

The ESM disbursed a total of €6.3 billion to Cyprus

Loans included €1.5 billion for recapitalisation of the Cooperative Central Bank Ltd

Repayment of loan principal starts in 2025, ends in 2031

Weighted average maturity of ESM loans: 14.9 years

0

200

400

600

800

1000

1200

2025 2026 2027 2028 2029 2030 2031

Cyprus's ESM loan repayment profile (€ million)

Key objectives of the adjustment programme

5

Macro

Fiscal

• Correcting the excessive government deficit

• Increasing the efficiency of the public sector

Structural

• Carrying out labour market reforms

• Removing obstacles in the services market

• Implementing privatisation programme

Financial

sector

• Downsizing, recapitalising and restructuring of the

banking sector

• Modernising legal, foreclosure and insolvency

frameworks

• Strengthening supervisory environment

Programme success

6

Cyprus’s decision of a ‘clean’ exit is supported by the Institutions

Programme achievements:

• Economic prospects improved: to 1.6% growth in 2015 from -5.9%

recession in 2013

• Unemployment is gradually declining

• Fiscal adjustment outperformed initial targets: public deficit declined to

1% in 2015 from 5.8% in 2012

• Liquidity and capital position of the banking system restored

• NPLs have peaked and are declining

• Market access was restored

• More than €1 billion cash buffer provides strong cushion

Fiscal adjustment helped to rebuild confidence

7

Source: European Commission

Fiscal performance helped to regain market access

After a deficit of almost 6% of GDP in 2012, the budget balance is expected to be slightly

positive in 2016

Government debt is now declining

Fiscal balance (% of GDP) Debt/GDP (%)

-10

-8

-6

-4

-2

0

2

2012 2013 2014 2015 2016

%

Fiscal balance Initial programme target (EC)

0

20

40

60

80

100

120

140

2012 2013 2014 2015 2016

%

Debt/GDP Initial programme target (EC)

Growth is better than expected

8

GDP is expanding: real GDP has grown for three quarters in a row and leading indicators

point to a continuation of the recovery

Program implementation led to a smaller recession and to a faster recovery than initially

expected

-8

-6

-4

-2

0

2

4

6

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%%

Quarter on quarter Year on year

Source: Eurostat and European Commission (EC)

GDP growth (%) Actual growth vs. initial targets (%)

-10

-8

-6

-4

-2

0

2

2012 2013 2014 2015

%

Actual Growth Initial programme target (EC)

The Cypriot banking system is now well capitalised

9

Public money was used for the recapitalisation of co-op banks only, the other systemic

banks were recapitalised with private funds

Bail-in was unavoidable to ensure debt sustainability

Capital controls were a necessity to secure the liquidity of the banks. Controls were

gradually relaxed and fully lifted in April 2015

Source: ESM

Capital increases

0

1

2

3

4

5

6

7

8

0

1

2

3

4

5

6

7

8

Q1 2013 Q1 2014 Q3 2014 Q4 2015 Total

EUR billionEUR billion

BoC bail-in Coops state-aid I BoC capital injection

Hellenic capital injection Coops state-aid II

Pri

vate

cap

ital

Stat

e-A

id

Reform agenda does not end with the programme

10

Address NPLs:

• Active management of NPLs is

essential to support recovery and

financing of the economy

• Securitisation law

Keep fiscal discipline

Continue labour market reform

Finalise privatisation agenda

Source: IMF, ESM calculation

Non-performing loans and provisions

0

10

20

30

40

50

60

70

0

5

10

15

20

25

30

35

Mar

.20

09

Jun

.20

09

Sep

.20

09

Dec

.20

09

Mar

.20

10

Jun

.20

10

Sep

.20

10

Dec

.20

10

Mar

.20

11

Jun

.20

11

Sep

.20

11

Dec

.20

11

Mar

.20

12

Jun

.20

12

Sep

.20

12

Dec

.20

12

Mar

.20

13

Jun

.20

13

Sep

.20

13

Dec

.20

13

Mar

.20

14

Jun

.20

14

Sep

.20

14

Dec

.20

14

Mar

.20

15

Jun

.20

15

%€ billion

NPLs Provisions NPL ratio (right hand scale)

Next steps: Early Warning System and post-programme surveillance

The ESM will operate its Early Warning System (EWS) until loans are fully

repaid

Euro area Member States exiting financial assistance fall under post-

programme surveillance

These countries will remain subject to enhanced surveillance until they have

paid back a minimum of 75% of the assistance received

Post-programme surveillance missions will be carried out twice a year by the

European Commission with the ECB, IMF and the ESM

11

Summary: economic recovery is gaining momentum; challenges remain

Fiscal consolidation efforts and bank restructuring ensured a successful return to

funding in financial markets

Cyprus is the fourth success story among EFSF/ESM programme countries

(after Ireland, Spain, and Portugal)

The example of Cyprus confirms that ESM’s loans-for-reform approach works

Challenges remain (high level of NPLs) and reform efforts must continue

12