Russia May Lend $3.4 Billion to Cyprus as Fiscal Woes Mount
Russia may lend as much as 2.5 billion euros ($3.4 billion) to Cyprus by the end of the year as the eastern Mediterranean island seeks cheaper funding amid surging borrowing costs.
“We’ll probably reach a final agreement only by the end of the year, no sooner,” Russian Deputy Finance Minister Sergei Storchak told reporters late yesterday in Washington.
The amount will depend on the country’s needs, he said. Cyprus is negotiating a loan at an annual rate of 4.5 percent, compared with as much as 14 percent demanded by other investors, the Cyprus News Agency reported today, citing President Demetris Christofias.
Greece is struggling to convince international creditors it deserves its next bailout payment to stave off a default, stoking fears that contagion will engulf Cyprus, the euro area’s third-smallest economy. The Cypriot government needs to raise funds to help finance its fiscal deficit, which may reach 5.5 percent of gross domestic product this year and 2 percent in 2012 and to refinance 1.7 billion euros of debt maturing in the period.
The yield on the Cypriot euro-denominated bond due February 2020 fell 146 basis points, or 1.46 percentage point, to 11.638 percent, the lowest since Aug. 2. The notes yielded a record 14.779 percent on Aug. 31.
Financing Needs
A Greek default would raise Cyprus’s financing needs above the amount it’s negotiating with Russia, said Marinos Gialeli, general manager of the Hotel Employees Provident Fund, the country’s largest with 266 million euros in assets.
Loans to the Greek private sector account for an estimated 35 percent of gross loans at Bank of Cyprus and 46 percent at Marfin Popular Bank, the nation’s two biggest lenders, Moody’s Investors Service said July 28 when it cut their credit ratings to non-investment grade, or junk. Greece is Cyprus’s biggest trading partner.
In the case of a Greek restructuring, Cyprus’s needs “will depend on the extent of the haircut and above all on the ability of bank clients to service their debts,” Gialeli said. “The problem is not the government bonds Cypriot banks have in their possession worth 5 billion euros but the 23 billion euros in loans extended to the private sector.”
The government may need to earmark as much as 1.5 billion euros for banks if holders of Greek debt are required to accept “extensive” losses, Gialeli said.
Largest Capital Exporter
Russia is the largest capital-exporting country among emerging markets, Commerzbank AG said in Sept. 9 report. The world’s biggest oil producer has recorded an average of $90 billion a year of outward capital flows since 2004 and $60 billion in the first half of 2011, according to Commerzbank.
The country helped grant a $3 billion bailout loan to Belarus by the Russian-led Eurasian Economic Community’s anti- crisis fund in June. Venezuelan President Hugo Chavez said Aug. 24 that he hopes to complete a $4 billion loan from Russia within weeks.
Russia turned down Iceland’s request for $500 million in 2009 after more than a year of negotiations.
The loan to Cyprus isn’t politically motivated and aims to ease unprecedented financial-market “turbulence,” Prime Minister Vladimir Putin’s spokesman, Dmitry Peskov, said today by telephone.
Not the Time
“Now is not the time to give away money for free in the name of political interests,” Peskov said, declining to comment on the terms of the loan. Issuing the funds will be “mutually beneficial.”
Mainly Russian non-residents hold one of every two euros deposited at Cypriot banks, directly or indirectly, according to Theo Parperis, chairman of the Institute of Certified Public Accountants of Cyprus.
Foreign companies that use Cyprus as a base or vehicle for offshore operations contribute about 15 percent to the island’s economy, said Parperis, who is also a partner in PricewaterhouseCoopers Cyprus.
The loan “makes sense given the heavy Russian offshore activity in Cyprus,” Barbara Nestor, an emerging-markets strategist at Commerzbank in London, said by e-mail today. “I think the financial system stability of Cyprus is in Russia’s interest and I could imagine that Russia would be a major bailout partner to Cyprus.”
Securing the loan from Russia may help Cyprus overcome its fiscal woes and “structural problems,” Alexandros Michaelides, Professor in Finance at the University of Cyprus said by e-mail today.
“Things with Greece are deteriorating and this highlights the need to take decision even more but it seems the government does not share this sense of urgency,” he wrote. “Probably, securing the loan from Russia and the expected revenues from natural gas exploitation may justify such a stance.”
To contact the reporters on this story: Scott Rose in Washington at rrose10@bloomberg.net; Stelios Orphanides in Athens at sorphanides@bloomberg.net
To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net
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