General government deficit increases as a result of CCB sale

General government deficit increased in the third quarter of 2018, following the decision of the Cyprus Statistical Office, in coordination with Eurostat, to classify the two entities created after the closure of the Cyprus Cooperative Bank Ltd (CCB) within the General Government sector.

In particular, a deficit of Euros 1,050.0 million was recorded in the third quarter of 2018 compared to a surplus of Euros 366.7 million in the corresponding period of the previous year, based on the preliminary data of the General Governments financial accounts. Total revenues amounted to Euros 2,163.6 million and total expenses to Euros 3,213.6 million.

The main categories of revenue for the period July-September 2018 were: taxes on production and imports Euros 854.7 mn (11.1% increase as compared to the third quarter of 2017), of which net VAT was Euros 535.3 mn (14.6% increase), taxes on income and wealth Euros 632.5 mn (0.4% increase), and social contributions Euros 444.9 mn (10.3% increase). Revenue from the sale of goods and services reached Euros 152.9 mn registering an increase of 9.3% as compared to the corresponding period of the previous year.

The capital account recorded an expenditure of Euros 1,595.7 mn (Euros 715.2 mn investment and Euros 880.5 mn capital transfers) as compared to Euros 98.4 mn during the corresponding period of 2017 (Euros 91.6 mn investment and Euros 6.8 mn capital transfers).

The remaining categories of expenditure for the period July-September 2018 were: social transfers Euros 605.6 mn (3.7% increase compared to the corresponding period of 2017), and compensation of employees (including imputed social contributions and pensions of civil servants) Euros 572.5 mn (5.0% increase). Intermediate consumption reached Euros 174.7 mn (15.8% increase as compared to the corresponding period of the previous year).

A negative investment of Euros 710 mn

According to the Statistical Service, the sale process of parts of the assets and liabilities of the Cyprus Cooperative Bank Ltd (CCB) to the Hellenic Bank resulted in the establishment of two new entities, namely the Cooperative Asset Management Company Ltd (SEDIPES) and Cyprus Asset Management Company Ltd (KEDIPES), which received assets with a book value of Euros 8.34 bn in return of a liability of Euros 3.54 bn. Upon examination of the sale process details and taking into consideration the legal status of the new entities, the Statistical Service has classified both entities within the General Government sector.

The fiscal burden of Euros 1.5 bn in the revised fiscal accounts of the third quarter that resulted from the above transaction is analysed as follows:

Non-performing loans (NPLs) of nominal value amounting to Euros 6.97 bn are an asset of the new entities. The real economic value of these NPLs has been estimated by CYSTAT to be 20.94% of the nominal value, i.e. decreased by 79.06%.

Therefore, the estimated real economic value of the NPLs received by the new entities is valued at Euros 1.46 bn. According to this valuation, a negative investment of Euros 710 mn is observed and recorded in fiscal accounts, which is the result of the acquisition value (Euros 2,17 bn) minus the real economic value of NPLs (Euros 2.17 bn – Euros 1.46 bn = Euros 710 mn).

Further to this negative investment, an expenditure of Euros 625 mn, which corresponds to the share of the collateral received from the former CCB and concerns its fixed assets, is recorded as investment. This investment increases the capital assets and hence the net worth of the General Government by the same amount.

Finally, CyStat also recorded as expenditure the guarantee of Euros 155 mn (contingent liability) received by the Hellenic Bank.

Source: Cyprus News Agency