Cyprus Confident of Bond-Market Access After Bailout Exit

Cyprus's Georgiades Says Country Must Continue Reforms
  • Finance Minister Harris Georgiades speaks in interview
  • Government working on swaps for bonds maturing in 4 to 5 years

Cyprus Finance Minister Harris Georgiades said he’s confident in his country’s ability to access the bond market, after the government won the blessing of its European partners and the International Monetary Fund to exit a three-year-old aid program with no safety net.

Even if there is “some nervousness” in debt markets lately, Cyprus’s borrowing cost is now lower than it was “back in the good days,” before the country sought emergency loans from the IMF and the euro area, Georgiades said in a Bloomberg TV interview in Brussels. Yields on 10-year notes fell 2 basis point to 4.06 percent at 3:42 p.m. in Nicosia on Tuesday. That’s up from a low this year of 3.75 percent in January.

Cyprus leaves its 10 billion-euro ($11 billion) bailout having used just 7.3 billion euros of the total, while the government of President Nicos Anastasiades opted against seeking a post-program precautionary credit line -- a step that would have involved more mandates from creditors. Georgiades said that Cyprus has built up sufficient cash buffers for the next three years and is now working on possible bond exchanges for obligations maturing in four or five years.

The country can thus go “a very long way” without the need to tap the debt markets, Georgiades said. “We shall not be in need of financing, but this does not say we shall not be out and about in the markets.”

In a statement after a meeting on Monday in Brussels, euro-area finance ministers endorsed the exit “without a successor arrangement” and hailed “the overall successful implementation of the program.” In a separate statement, IMF Managing Director Christine Lagarde said the bailout of Cyprus had delivered “an impressive turnaround of the economy.”

Cyprus, an island nation in the eastern Mediterranean, has gone from a sick patient that came close to shattering the euro area in March 2013, when a haircut on deposits was imposed, to a model of economic adjustment, with some bumps along the way. It returned to economic growth last year, after making a comeback to international bond markets in 2014.

Deposits have now stabilized and the country’s lenders have no need for Emergency Liquidity Assistance from the central bank, Georgiades said. Cyprus lifted restrictions on capital transfers last year, without witnessing deposit flight, as confidence was gradually restored after the imposition of losses on savings over 100,000 euros in 2013.

In their statements on Monday, the euro area and IMF highlighted improvements in the health of Cyprus’s lenders, with the finance ministers saying the Cypriot banking system “has undergone a deep transformation” and Lagarde saying it “is on a much more solid footing and workouts of non-performing loans are accelerating.”

Asset Sales

Still, the country is rated below investment grade by all major rating companies, meaning it won’t be eligible for a waiver allowing it access to the European Central Bank’s bond-buying program after its exit from the bailout, while its lenders won’t be allowed to pledge government securities as collateral for access to the ECB’s regular financing lines.

The benefits of ECB’s bond-buying program for Cyprus were too insignificant to justify remaining in an international-aid program, Georgiades told reporters in Brussels Tuesday. “Being in a program or not doesn’t really make too much of a difference -- at least not in our case,” he said, adding that the Frankfurt-based ECB was active in Cypriot asset purchases “for two weeks last July and then again for two weeks last October -- that’s it.”

The lack of access to the ECB’s refinancing operations after the end of the program should have a limited impact on Cypriot banks, a person familiar with the situation said. The country’s lenders have improved the funding positions over the past quarters, according to the person who asked not to be named because the matter is not public.

At the same time, Cyprus’s euro partners urged the completion of one piece of unfinished business in the aid program: the privatization of the Cyprus Telecommunications Authority.

The state asset sale, together with a public-administration overhaul and other structural reforms discussed during the program, would cement improvements in public finances and support sustained economic growth, the ministers said, as the government of Anastasiades braces for legislative elections in May.

“Once the issues of the ECB waiver and the legislative elections are out of the way, the markets should focus on Cyprus’s strong macro and fiscal performance as well as the potential of a rating increase,” Dimitris Drakopoulos, an analyst at Nomura International, said in an e-mail.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE