Cooperative bailout to cost Cyprus taxpayers €2 billion by 2030

The state’s support for Cyprus’ former cooperative banking sector is expected to cost taxpayers around €2 billion between 2014 and 2030, with the final bill depending heavily on how much of the outstanding assistance can be recovered, the Audit Office has warned. In a report examining the effectiveness of state-owned asset management company Kedipes in repaying state support provided to the former Cyprus cooperative bank, the Audit Office said the estimated cost includes the original recapitalisation, funds expected to remain unpaid and the cost of financing the state’s assistance. The estimate comprises the €1.67bn initial recapitalisation, less €175 million recovered, a further €340 million expected not to be repaid from the €3.54bn in state support, and an estimated €200 million in financing costs. The €340m figure reflects Kedipes’ estimate that 90 per cent of the state support will ultimately be repaid, leaving 10 per cent outstanding. The financing cost arises because the state’s funding to Sedipes, the entity that remained after the transfer of the bank’s healthy assets, earns an interest rate of just 1 per cent. Auditor-General Andreas Papakonstantinou said the final cost will depend primarily on whether the 90 per cent recovery target is achieved, while warning that loans which have not yet been managed could prove to be among the most problematic. He also cautioned that as the loan portfolio shrinks, interest income will fall, reducing the ability to repay the state’s outstanding claim. The report forecasts that a portfolio with a nominal value of €2.4bn will remain in 2030, although its actual value is expected to be lower. “Its recoverable value, how it is utilised and any possible extension of its management will affect the final overall fiscal burden and will constitute the next major challenge,” the report said. By March 31, 2026, Kedipes had made total repayments of €1.76bn towards state support, the Audit Office said. Of that amount, €1.68bn was repaid in cash, €73m related to expenditure under the Rent in Exchange for Instalment scheme, and €12m consisted of other repayments, including loan settlements under the Estia scheme and the Central Agency for Equal Distribution of Burdens. From bank rescue to asset recovery The report provides a brief history of the collapse of the cooperative banking sector, which required substantial public funding but failed to become sustainable. Despite a €1.67bn recapitalisation in 2014 and 2015, the cooperative Cyprus Bank remained unviable, Papakonstantinou said in his foreword. On March 29, 2018, daily deposit outflows reached €126m, while the bank’s loans were unable to generate sufficient liquidity. The situation was particularly difficult because non-performing loans accounted for 58.8 per cent of total lending in September 2017. Following an additional €3.54bn in state support, Hellenic Bank acquired the healthy part of the Cyprus cooperative bank’s portfolio, known as the “good bank”, with assets of €9.34bn and liabilities of €8.96bn, for €74.2m. The transaction generated an immediate accounting gain of €298m. The remaining entity, referred to as the “bad bank”, was renamed Sedipes. At December 31, 2018, following valuations, Sedipes had assets of €3.84bn and liabilities of €4.01bn, including a €3.57bn debt to the state. Sedipes established Kedipes to manage most of its assets, with the aim of maximising repayments to the state, primarily through the outsourcing of its portfolio management to Altamira Cyprus. The Audit Office said Kedipes’ management was working to recover the state assistance within the framework of inherited contracts, employment commitments and restrictions, which had limited the company’s flexibility. It added that a new agreement with Altamira Cyprus had significantly improved the terms, although the ultimate financial benefit would depend on sales of loan portfolios and properties. Concerns over asset disposals and Altamira contract The audit identified shortcomings in the supervision of Altamira Cyprus, valuations conducted as part of the disposal of cooperative Commercial Companies, as well as recruitment, promotions and the effectiveness of staff departure schemes. In examining the disposals of the cooperative Commercial Companies, the Audit Office calculated the value of Sedipes’ stakes at €60.3m. Compared with the net consideration received, the estimated negative financial impact for the Cyprus cooperative bank and Sedipes was between €9m and €12m, the report said. For Sopaz and Nea Sevegep, the total price obtained was lower even than the minimum value of the stakes as assessed in 2015. The Audit Office said the two companies appeared capable of covering the minimum buyout value, potentially through gradual repayment, without an immediate impact on their liquidity. The report also said there was insufficient evidence that the overall outcome of the disposals matched what a prudent private seller would have sought under comparable circumstances. It added that valuations had not been updated in a timely manner, financial data had weaknesses and the handling of shareholdings was inconsistent. These shortcomings weakened Sedipes’ negotiating position and meant it could not demonstrate that it had secured the best possible financial outcome. Regarding Altamira, the Audit Office said the terms of the original agreement were not in line with market conditions, at least at the time of the assessment. The agreement, which it considered financially disadvantageous to Kedipes, remained in effect from January 1, 2018, until the new agreement was applied retrospectively from January 1, 2020. However, the financial impact on the Cyprus cooperative bank and Kedipes could not be accurately quantified because of the complexity of the method used to calculate Altamira Cyprus’ remuneration. According to Kedipes’ calculations, the new agreement was expected to reduce total management costs by 24 per cent compared with the original terms. The reduction stemmed from a substantial cut in the fixed component of Altamira’s remuneration and a strengthening of the variable component, alongside significantly lower charges if assets under management were withdrawn or the contract was terminated. The overall reduction was estimated at €77.6m. The Audit Office said the actual benefit to Kedipes would depend to a large extent on the structure of the solutions reached, particularly the extent to which they involved the sale of large loan portfolios or properties. Oversight of Altamira Cyprus The Audit Office found that the framework initially established to monitor Altamira Cyprus’ work was not sufficiently developed, and that no financial or other consequences had been set out in the event of performance targets being missed. For more than four and a half years, from January 2018 to October 2022, an inadequate system for monitoring and controlling Altamira’s performance remained in place, the report said. It also identified weaknesses in the monitoring of property management. Reports produced by Kedipes’ Property Management Monitoring Department contained findings without sufficient documentation of the audit work, were sent to Altamira Cyprus with significant delays and did not cover all critical property management procedures. As a result, the Audit Office said, there had been no comprehensive and effective framework for timely oversight of Altamira’s work for a lengthy period, creating a risk that shortcomings would not be addressed promptly. It added, however, that monitoring arrangements have since improved, particularly following the new agreement, the strengthening of the service responsible for monitoring the servicer’s work and the gradual implementation of recommendations arising from Kedipes’ internal audit unit. Recruitment, promotions and staff departure schemes According to Kedipes, the former Cyprus cooperative bank board’s decision to allow employees to freely choose the organisation to which they would transfer, without selection criteria, left the company with staff who in several cases lacked the specialist skills required to manage non-performing loans. Kedipes subsequently recruited specialised staff and introduced a voluntary exit scheme. The Audit Office’s review of recruitment procedures found that not all required stages had been fully followed under the policies and procedures manuals in force at the time. In some cases, selected candidates did not meet all the requirements of the relevant job descriptions. In other instances, the wording of the job descriptions concerning required professional experience was unclear, making it impossible to establish whether candidates met the criteria. The report also found that qualifications set out in some recruitment notices were excessively extensive and restrictive, limiting the pool of potential candidates and the level of competition. In one case, a selected candidate presented a two-year qualification, raising questions about whether it was equivalent to a university degree, but was not asked to seek an assessment from the Cyprus Council for the Recognition of Higher Education Qualifications (Kysats) to establish compliance with the job requirements. Between September 2018 and December 2024, Kedipes made 48 external hires, of whom 15 resigned within a short period. The company attributed the departures to its limited expected lifespan and the use of fixed-term employment contracts. The Audit Office also found that promotions were being granted without employees taking on upgraded duties. In addition to annual increments, salary promotions and increases for acquiring additional qualifications, salary upgrades within the same pay scale were being granted to 3 per cent of staff not covered by the promotion process. At December 31, 2024, nine services and departments were staffed solely by directors or heads, without subordinate employees. The Audit Office questioned whether separate services or departments and director or head positions were necessary in such cases. It also found that four departments consisted only of officers, without a director or head, raising questions about the assignment, guidance and supervision of their work. Kedipes had introduced three voluntary exit schemes by the end of 2024, mainly aimed at reducing staff numbers. Despite spending a total of €13.3m, the 2021 and 2022 schemes failed to achieve their targets for reducing staff to the desired level, the report said. No specific headcount reduction target had been set for the 2023 scheme. Complaint over loan security The Audit Office said it had also received a complaint alleging that charges over property securing a loan originally worth €540,000 had been removed in 2017 in circumstances that could involve criminal offences. As a result, the outstanding loan, which is not being serviced, is now unsecured. After receiving Kedipes’ comments, the matter was referred to the police for investigation.