News Column

Bond issue 'a step in the right direction'

June 20, 2014



By Elias Hazou

CYPRUS' €750m bond issue is a step in the right direction for restructuring the national debt, but the country with its deep economic problems is not out of the woods yet, the ruling party said yesterday.

"Given the circumstances, and the interest rate we have secured, it is an important step. With this move, we have covered a lot of the ground on the path toward normalcy, but there is still some way to go," party spokesman Prodromos Prodromou told the press.

"The risks are still there," he added. "Fiscal consolidation is only part of the recipe for success. We also need the reforms that will render the Cyprus economy competitive."

The government is swapping €750m in domestic borrowing for external debt, the chief advantage being the lower interest rate, he said.

Currently the government is paying a nominal interest rate of 5.15 per cent on domestic debt, compared to the 4.75 per cent it's paying on the five-year bond, maturing in June 2019.

The banks would also benefit by replacing government paper (bonds) with cash, thereby increasing liquidity in the system.

Moreover, lenders would be able to release provisions for capital that they have so far been obliged to keep on their books for holding bonds that are classed as toxic or junk, Prodromou said.

"This is no time for celebration, but neither for self-pity," he added, alluding to opposition parties' reaction to the bond issue.

The opposition's criticism was fairly subdued, as they were obliged to acknowledge that the vaunted return to the markets was a positive development.

AKEL said however that it remains to be seen where the €750m will be channelled– would it be used to refinance existing debt or to pay off old debts, it asked.

"It [the bond issue] may be a corrective step, but it is not expected to affect the rising unemployment, nor the pauperization of the people, and obviously it does not change today's tragic economic situation whatsoever."

AKEL noted moreover that the bond issue attracted a great deal of interest not because of an improvement in the fundamentals of the Cyprus economy, but rather because the European Central Bank (ECB) recently slashed interest rates, making high-yield investments a rarity.

Centrist party DIKO said the ultimate goal should be converting all of the country's debt to foreign borrowing, and at interest rates "less onerous than today's."

Given the "vote of confidence" in Cyprus from foreign bond investors, DIKO argued, the government must strike while the iron is hot and seek to renegotiate with the troika some of the clauses of its bailout deal, such as the definition of Non-Performing Loans.

Cyprus' total domestic debt currently stands at €4.1bn.

Domestic debt is included in the total public debt, so the €750m borrowed from the markets does not increase the overall total national burden.

The island was shut out of international capital markets in May 2011, and the Anastasiades government has been playing up the fact that Cyprus took the least time to make its market comeback among all the EU countries undergoing an economic adjustment programme.

Economist Mike Spanos said the bond issue is overall a positive move, carrying interest lower than the domestic cost of borrowing.

"The coupon (interest) is still a bit on the high side though, considering the ECB's recent drastic cuts in interest rates," he said.

And one should put things into perspective, such as that the Cypriot bond is comparatively the most expensive among eurozone countries.

Cheap money, a policy pursued by the ECB, means bond yields are at record lows, making even moderate returns attractive to hungry investors, said Spanos.

Cheap credit also creates market distortions, which would explain why a country with expected negative economic growth (minus 4 per cent forecast for this year) and an unemployment rate of around 20 per cent is still able to borrow abroad at interest rates that would otherwise suggest the investment is relatively risk-free.

"There is moreover no guarantee that Cypriot banks, once they get the cash from the government's bond issue, will move the money down the road," added Spanos.

The economist reiterated his view that, instead of borrowing from the markets, Cyprus should ideally apply to extend its adjustment programme so that it can continue servicing its debt at 2 per cent from the European Stability Mechanism.

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Source: Cyprus Mail


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