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EU Commission approves Cyprus bank liquidity scheme
The European Commission has approved the Cyprus government’s plan to use special government bonds to reinforce stability in financial markets and mitigate the effects of the current financial downturn under EC Treaty state aid rules. The Commission found the measure to be in line with its Guidance Communication on state aid.
Under the scheme, Cyprus will issue up to €3 billion in special government bonds that it will lend to credit institutions to use as collateral to obtain liquidity from the European Central Bank (ECB) and on interbank markets. The credit institutions are to use the liquidity raised for housing loans and loans to SMEs on competitive terms.
The bonds will pay no interest and will have a maximum maturity of three years. They will be lent to eligible credit institutions against collateral and the payment of a fee. The scheme will be open to solvent credit institutions incorporated in Cyprus, including subsidiaries of foreign credit institutions. Eligible credit institutions will have up to six months to join the scheme, starting from the day the implementing national law enters into force but not later than 30 November 2009.
There are a number of safeguards to protect against distortions of competition. For example, beneficiaries are forbidden from using funds provided under the scheme to expand their business in a disproportionate manner or to undertake aggressive business strategies. The measure is limited in time and scope, requires adequate remuneration and foresees sufficient safeguards to minimise distortions of competition. The Commission therefore concluded that the scheme is compatible with Article 87.3.b. of the EC Treaty