ECB Suspends Cyprus Government Bonds as Collateral

The European Central Bank said Cyprus’s government bonds are temporarily ineligible as collateral after the Mediterranean island nation’s credit rating was cut by Fitch Ratings and Standard & Poor’s.

The Governing Council “has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Republic of Cyprus for use as collateral in Eurosystem monetary policy operations,” the Frankfurt-based ECB said late yesterday in a statement.

Cyprus’s local-currency issuer rating was lowered to restricted default from CCC by Fitch Ratings yesterday after the nation completed an exchange of government bonds for longer-dated securities. Standard & Poor’s cut Cyprus’s sovereign credit ratings to selective default.

The ECB said its decision no longer to accept Cyprus’s government bonds as collateral “takes into account the changes in the credit rating of the Republic of Cyprus as a result of the transactions announced by the Ministry of Finance of the Republic of Cyprus.”

Cyprus dodged a disorderly sovereign default and unprecedented exit from the euro in March by bowing to demands from creditors to shrink its banking system in exchange for a 10 billion-euro ($13 billion) aid package. The government imposed capital controls as it resolved its second-biggest lender, Cyprus Popular Bank Pcl.

‘Fully Committed’

Cyprus’s euro-area partners told the government in Nicosia on June 25 to remain “fully committed” to the terms of its rescue, after President Nicos Anastasiades had sought some leeway in dealing with the country’s financial crisis.

Finnish Finance Minister Jutta Urpilainen reiterated that message today, saying the euro area has “made its decisions” and it’s up to Cyprus to deliver on the terms of the bailout.

“I don’t think the Eurogroup has anything more to do in this situation,” Urpilainen said in an interview in Kokkola, Finland. Euro-area finance ministers have made a decision, “and the initiative is now with Cyprus.”

The ECB said it will reassess the potential eligibility of Cypriot marketable debt instruments upon the conclusion of the bond exchange.

The settlement date for the exchanged bonds is July 1 and Fitch said yesterday it will raise the country to a rating that’s “likely to be low speculative grade” shortly thereafter. Standard & Poor’s said the ratings could be raised again as early as next week to CCC+.

Bailout Terms

The bond exchange is part of commitments under the bailout, the Finance Ministry said. As long as the ECB doesn’t accept government bonds as collateral, banks using such bonds to obtain funding will have to tap their national central banks’ Emergency Liquidity Assistance programs.

“Liquidity needs may be addressed by the relevant national central banks in line with existing Eurosystem arrangements,” the ECB said in the statement. “We welcome Cyprus’ efforts to return to growth and prosperity within the framework of the program.”

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