While Cyprus is able to procure financial resources on its own, policy conditionality and monitoring is still in place, and will be for a substantial amount of time. The EU’s PPS will last at least until 2029, i.e. 13 years from now, while the IMF’s PPM will last until Cyprus has repaid more than €820 mln to the IMF.
On March 2016, Cyprus became the fourth out of the five Eurozone Member States under European Union (EU) – International Monetary Fund (IMF) financial assistance to end its program – a so called ‘exit’ (IMF on the 7th). Despite appearances and terminology, however, this is actually not a whole-out, true program exit. What does it really mean to end an EU-IMF program, and is it really an ‘exit’?
Cyprus requested financial assistance on 25th of June 2012. The request came amid growing problems within the Cypriot banking sector, primarily due to its exposure to Greek debt and Private Sector Involvement (PSI) Greek bond ‘haircut’ process. However, the program was entered into almost a year after (29th of April 2013), on account of differences that arose during the negotiations between the Troika and the Cypriot government. Because of the prolonged negotiating period and the consequent increasing flight of capital from Cypriot banks, a bank holiday was imposed for almost two weeks and ensuing capital controls continued for two years until April 2015. Cyprus borrowed a total of up to €10 bln from the EU-IMF financial assistance: €9 bln from ESM and €1 bln from IMF (equal to 563 per cent of Cyprus’ IMF quota).
What of the process of EU-IMF financial assistance? The financial assistance program consists of two parts: (1) the financial assistance or loan agreement, and (2) the policy adjustment that this assistance is conditional upon, outlined in the now infamous Memorandums of Understanding (MoUs). This policy conditionality is monitored by the so-called Troika: The European Commission (EC), the European Central Bank (ECB) and the IMF. The MoUs, as well as the intrusive monitoring capacity that the Troika has in the Member States under this policy conditionality framework that cover an extensive amount of policies that are key to a State (e.g. budget or taxation), have raised concerns in terms of the democratic process. The end of the program is often portrayed as the long awaited remedy and redemption of democratic process. But is this really the case?
The process of ending a financial assistance program is similar for the EU and the IMF. For the IMF, after the program concludes, and provided that the State concerned owes more than the amount of the assistance equivalent to 100 per cent of its IMF quota (or should it be deemed necessary by the IMF regardless of the amount owed), the process of Post-Program Monitoring (PPM) is initiated. The process was introduced in 2000 and is provisioned under the IMF’s operating principles. PPM aims at ensuring that the State concerned returns the amount owed to the IMF regularly and on time, by monitoring policies and circumstances of that State in order to identify and address risks that could jeopardize its progress to external viability and thus impair repayment of the IMF. PPM is conducted normally twice a year.
For the EU, there has been a similar process instituted, termed Post-Program Surveillance (PPS), under Article 14 of Regulation 472/2013. PPS applies as long as the Eurozone Member State concerned has repaid less than 75% of the financial assistance under the ESM (or the previous EFSM and EFSF SA). Under PPS, the EC and ECB conduct regular review missions to the State concerned to assess its economic situation and, where applicable, report on corrective measures, which the Council can then request be adopted by that State. It is also worth noting that the voting procedure in the Council is reverse qualified majority (RQMV), i.e. the Commission’s report is deemed adopted unless a blocking majority is formed, making it easier to adopt the report and harder to reject it.
In essence, then, the ending of the program only refers to the ability of the State concerned to procure capital through the markets on its own. The policy monitoring and conditionality aspects remain very much in place for a substantial amount of time after financial assistance has ended, as does the Troika monitoring and supervision.
As such, it is clear that Cyprus is a long way from actually exiting its EU-IMF program, as are the rest of the Eurozone Member States that received assistance. While Cyprus is able to procure financial resources on its own, policy conditionality and monitoring is still in place, and will be for a substantial amount of time. The EU’s PPS will last at least until 2029, i.e. 13 years from now, while the IMF’s PPM will last until Cyprus has repaid more than €820 mln to the IMF.
The democratic repercussions of this in the political realm are considerable. Through the EU-IMF financial assistance process, Cyprus will have been under close policy monitoring and conditionality effectively for close to 20 years! And this is considering Cyprus’ limited financial assistance; consider, for example, the rest of the Eurozone Member States which have received considerably more assistance (e.g. Greece through the EU).