Aug. 4 (Bloomberg) -- Cyprus may be forced to join euro- region counterparts Greece, Ireland and Portugal in asking for financial assistance amid power shortages, a fiscal crisis and 10-year bond yields above 10 percent.
An explosion destroyed a power station last month that provided more than 50 percent of the island nation’s electricity. The disaster occurred as the country’s banks brace for losses from their Greek government debt holdings. Cyprus’s credit rating was lowered by Moody’s Investors Service on July
27 and two of its banks were cut to junk the next day.
While Cyprus is about one-tenth the size of the Irish and Portuguese economies, a fourth bailed-out state in little more than a year would further test euro-area leaders, already under strain following last month’s negotiations for a second rescue package for Greece. It also may further dent confidence in a region struggling to grow amid rising deficits.
“There is a distinct risk that Cyprus will be the next bailout candidate,” said Christopher Rieger, head of fixed- income strategy at Commerzbank AG in Frankfurt. “Even though it is a small market, if they need to be rescued, we will also see countries complaining about another bailout.”
The yield on 10-year Cypriot bonds climbed more than 5.5 percentage points since the start of the year to 11.37 percent yesterday, compared with the 14.99 percent rate for Greek securities of similar maturity and 11.19 percent for 10-year Portuguese debt.
An explosion destroyed a power station last month that provided more than 50 percent of the island nation’s electricity. The disaster occurred as the country’s banks brace for losses from their Greek government debt holdings. Cyprus’s credit rating was lowered by Moody’s Investors Service on July
27 and two of its banks were cut to junk the next day.
While Cyprus is about one-tenth the size of the Irish and Portuguese economies, a fourth bailed-out state in little more than a year would further test euro-area leaders, already under strain following last month’s negotiations for a second rescue package for Greece. It also may further dent confidence in a region struggling to grow amid rising deficits.
“There is a distinct risk that Cyprus will be the next bailout candidate,” said Christopher Rieger, head of fixed- income strategy at Commerzbank AG in Frankfurt. “Even though it is a small market, if they need to be rescued, we will also see countries complaining about another bailout.”
The yield on 10-year Cypriot bonds climbed more than 5.5 percentage points since the start of the year to 11.37 percent yesterday, compared with the 14.99 percent rate for Greek securities of similar maturity and 11.19 percent for 10-year Portuguese debt.
Moody’s Downgrade
Cyprus’s debt rating was cut two steps by Moody’s to Baa1 from A2, three levels above speculative grade, with a negative outlook. The downgrade followed the destruction of the power station, a “fractious political climate,” and the additional risk that some banks will need state support because of their exposure to Greece. Moody’s lowered the credit ratings of Marfin Popular Bank Public Co. and Bank of Cyprus Public Co. to non- investment grade, or junk. Standard & Poor’s cut Cyprus to BBB+ from A- on July 29.
Yields are climbing in Cyprus because the nation’s banks hold so much Greek debt, according to Marios Demetriades, a fund manager at Piraeus Bank Cyprus in Nicosia. Bank of Cyprus, the Mediterranean island’s largest lender, has 55 percent of its tier one capital, designed to be a buffer against losses, in Greek government bonds, according to Moody’s. Marfin Popular Bank, the second-largest bank, has 95 percent.
Yields are climbing in Cyprus because the nation’s banks hold so much Greek debt, according to Marios Demetriades, a fund manager at Piraeus Bank Cyprus in Nicosia. Bank of Cyprus, the Mediterranean island’s largest lender, has 55 percent of its tier one capital, designed to be a buffer against losses, in Greek government bonds, according to Moody’s. Marfin Popular Bank, the second-largest bank, has 95 percent.
‘Material Risk’
There’s a “material risk” that losses on Greek holdings will force the country’s banks to seek rescue funds in “the next few years,” Moody’s said. The Cypriot economy won’t grow at all this year and by 1 percent in 2012, Moody’s said. That follows a 3.1 percent gain in 2010 and a 2 percent contraction a year earlier.
The nation’s budget deficit widened to 3.5 percent of GDP in the first half of 2011, the Finance Ministry said on Aug. 1.
Public debt will peak at 62 percent of economic output in 2012, compared with 61.6 percent this year and 60.9 percent in 2010, according to the ministry.
“Cyprus is clearly on the verge of bankruptcy,” said Stuart Thomson, a fund manager at Ignis Asset Management in Glasgow, which oversees $120 billion. “Losses in the banking sector will drive it into recession and will force the European institutions to provide funds to bail out the banks. On top of that, the economy isn’t diversified enough to allow any way to grow out of these problems.”
The nation’s budget deficit widened to 3.5 percent of GDP in the first half of 2011, the Finance Ministry said on Aug. 1.
Public debt will peak at 62 percent of economic output in 2012, compared with 61.6 percent this year and 60.9 percent in 2010, according to the ministry.
“Cyprus is clearly on the verge of bankruptcy,” said Stuart Thomson, a fund manager at Ignis Asset Management in Glasgow, which oversees $120 billion. “Losses in the banking sector will drive it into recession and will force the European institutions to provide funds to bail out the banks. On top of that, the economy isn’t diversified enough to allow any way to grow out of these problems.”
Financing Pressure
Cyprus must make a 1 billion-euro ($1.43 billion) payment to bondholders in the first quarter of next year, according to data from the national debt management office. That compares with outstanding debt of 8.75 billion euros and a gross domestic product of 25 billion euros in 2010.
The Cypriot government has 410 million euros in cash and deposits to finance its debt and doesn’t face any major maturities until the middle of December, the Finance Ministry said on Aug. 1. The government needs a total of 650 million euros in financing through mid-December, it said.
“When Cyprus has to come back to the primary market next year, financing will be very difficult,” said Norbert Aul, a European rates strategist at RBC Capital Markets in London.
“This is when you will see the problems emerging. Economically, it isn’t a big thing, but it will add to the negative perception of the smaller and weaker euro-region credits.”
The Cypriot government has 410 million euros in cash and deposits to finance its debt and doesn’t face any major maturities until the middle of December, the Finance Ministry said on Aug. 1. The government needs a total of 650 million euros in financing through mid-December, it said.
“When Cyprus has to come back to the primary market next year, financing will be very difficult,” said Norbert Aul, a European rates strategist at RBC Capital Markets in London.
“This is when you will see the problems emerging. Economically, it isn’t a big thing, but it will add to the negative perception of the smaller and weaker euro-region credits.”
Turkish Ties
Greece, which first settled Cyprus as long ago as 1,400 BC, was the first euro-region nation to receive a bailout, in April 2010. It was followed in November by Ireland and by Portugal in May of this year. Collectively, they represent about 5.9 percent of euro-region GDP, compared with 0.2 percent for Cyprus, according to Eurostat.
Cyprus gained independence from the U.K. in 1960. Turkey then invaded the island in 1974 in response to inter-communal violence between Greek and Turkish-speaking citizens. It still controls 37 percent of the island, which it calls the Turkish Republic of Northern Cyprus, and is recognized only by Turkey.
Demetris Christofias, the communist president of the internationally recognized Republic of Cyprus, who asked his cabinet to resign on July 28, lost his coalition partner DIKO yesterday over a dispute related to reunification talks and the depth of budget cuts.
Failure to get the country’s economy back on track may unleash a fresh wave of anti-bailout sentiment. Slovakia’s SaS party, which the governing coalition needs to secure a parliamentary majority, said last week it opposes the country’s participation in a permanent euro aid fund or bolstering a temporary fund. It also rejects terms of the Greek rescue package.
“The markets are very impatient so you have to be ahead of the curve and unfortunately Cyprus is behind the curve,” said Demetriades. “To get the liquidity and get people to lend, you really need to convince the market that you are taking the necessary steps. Come the beginning of 2012, that’s when the big test will be.”
Cyprus gained independence from the U.K. in 1960. Turkey then invaded the island in 1974 in response to inter-communal violence between Greek and Turkish-speaking citizens. It still controls 37 percent of the island, which it calls the Turkish Republic of Northern Cyprus, and is recognized only by Turkey.
Demetris Christofias, the communist president of the internationally recognized Republic of Cyprus, who asked his cabinet to resign on July 28, lost his coalition partner DIKO yesterday over a dispute related to reunification talks and the depth of budget cuts.
Failure to get the country’s economy back on track may unleash a fresh wave of anti-bailout sentiment. Slovakia’s SaS party, which the governing coalition needs to secure a parliamentary majority, said last week it opposes the country’s participation in a permanent euro aid fund or bolstering a temporary fund. It also rejects terms of the Greek rescue package.
“The markets are very impatient so you have to be ahead of the curve and unfortunately Cyprus is behind the curve,” said Demetriades. “To get the liquidity and get people to lend, you really need to convince the market that you are taking the necessary steps. Come the beginning of 2012, that’s when the big test will be.”
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