The European Commission has approved under EC Treaty state aid rules a Cypriot scheme using special government bonds to reinforce stability in financial markets and mitigate the effects of the crisis.

The European Commission has approved under EC Treaty state aid rules a Cypriot scheme using special government bonds to reinforce stability in financial markets and mitigate the effects of the crisis. The Commission found the measure to be in line with its Guidance Communication on state aid to overcome the current financial crisis. In particular, the measure is limited in time and scope, requires adequate remuneration and foresees sufficient safeguards to minimise distortions of competition. The scheme therefore constitutes an adequate means to remedy a serious disturbance in the Cypriot economy and is compatible with Article 87.3.b. of the EC Treaty.

Competition Commissioner Neelie Kroes said: "The Cypriot scheme will contribute to limiting the impact of the financial crisis without creating disproportionate distortions of competition."

Under the scheme, Cyprus would issue special government bonds that it would lend to credit institutions to use as collateral to obtain liquidity from the European Central Bank (ECB) and on interbank markets. The credit institutions would use the liquidity raised for housing loans and loans to small- and medium- sized enterprises on competitive terms.

The special bonds would pay no coupons and would have a maturity of maximum three years. They would be lent to eligible credit institutions against collateral and the payment of a fee.

The scheme would be open to solvent credit institutions incorporated in Cyprus, including subsidiaries of foreign credit institutions. The window to enter the scheme would be a period of six months starting from the day the implementing national law would enter into force but not later than 30 November 2009. The overall budget of the scheme is €3 billion.

A number of behavioural safeguards ensure that distortions of competition are minimised. Inter alia, beneficiaries are not allowed to expand their business in a disproportionate manner or to undertake aggressive business strategies.