The Council of Ministers approved on Wednesday a set of criteria on the provision of government guarantees with a view to minimising risk to public debt.
The criteria were drafted with the technical assistance of the IMF, in the context of the completion of the public financial management process and were part of the conditions of the island`s €10 billion bailout.
According to the document obtained by CNA, an applicant can receive a government guarantee only if various general and financial criteria are met. The newly established Government Guarantee Management Office, under the Treasury, will monitor government guarantees on a quarterly basis and submit a report to the Finance Minister on a bi-annual basis.
The general criteria, inter alia, stipulate that state-owned entities and semi-governmental organisations can receive government guarantees only for development projects and that no guarantees would be granted for loans aiming at covering operational expenditures. Furthermore, no government guarantee can be granted if it breaches EU state aid rules. Prior to the approval of government guarantee, the Finance Ministry Treasury Unit had to evaluate the credit risk associated with a guarantee.
Additional criteria apply in case of government guarantees for financial institutions, namely that guarantees should be given only in extraordinary cases for the protection of the financial stability and in accordance with the Banking Business Law and banking resolution legal framework.
The proposal also includes three economic criteria, namely that the preliminary examination of a project for which government guarantee is requested should present positive value, the preliminary examination should show that the applicant has the ability to repay the loan and that the total amount of government guarantees should comply with the government`s macroeconomic and fiscal targets thereby safeguarding public debt sustainability.
Furthermore, the document imposes a cap on government guarantees that will be outlined in the Medium Term Budgetary Framework and the annual State Budget.
Currently the issued government guarantees amount to 3.1 billion. Before applying for a bailout in June 2012, Cyprus issued a €1.8 billion to Cyprus Popular Bank to cover its capital needs. However, the eventual bailout agreed in March 2013 with the EU and the IMF stipulated that CPB would be wound down and its assets including the bond would be absorbed by Bank of Cyprus, the island`s largest lender.