Feb 25 - The stance of the new Cypriot president-elect and his government
could make the country's negotiations with the Troika for a rescue package less
challenging than under the outgoing president, Fitch Ratings says. Nicos
Anastasiades has stated his intention to secure "timely financial support," and
now arguably has a mandate to conclude negotiations. He has already been
building relations with leaders of key European partners, including Germany.
However, despite his overwhelming victory in the weekend's elections he will
face the same policy challenges as his predecessor, and there is still lingering
uncertainty about the timing and details of an EU rescue programme.
We downgraded Cyprus to 'B'/Negative in January, mainly because we consider that
bank recapitalisation costs are likely to be higher than previously thought. But
the rating is supported by our expectation that the authorities will reach
agreement with the Troika on an official financing programme in time to pay a
EUR1.4bn bond redemption on 3 June. The final details will depend on the Troika
and the government's assessment of debt sustainability, which has not yet been
A bailout programme is unlikely to include restructuring of Cypriot sovereign
debt, because it would not provide significant debt relief. It would also weaken
the credibility of eurozone policy makers, who have said that Greece's private
sector involvement (PSI) was an exception, and could create contagion risks for
other eurozone countries. That some of the debt held by foreign investors is
covered by international law could also add to the costs and uncertainty of PSI.
We expect the Cypriot government to privatise some state-owned enterprises as
part of a final agreement with the Troika, but there is uncertainty about how
much debt relief this would achieve. We would expect any restructuring of bank
debt to be restricted to junior debt holders, though banks are mostly deposit
financed, which limits the potential impact. We also think there is a
possibility of mutualisation of bank recapitalisation costs with eurozone
partners, for example through the European Stability Mechanism, although this is
not our base case.
The previous government had requested official help from their European partners
and the IMF in June 2012, although a Memorandum of Understanding has yet to be
signed. The government has been shut out from debt markets for almost two years.
A bilateral EUR2.5bn loan from Russia at the end of 2011 helped with most of the
public financing requirements last year. The Russian government has signalled
that it will extend the maturity of the loan which was due in 2016. According to
reports Anastasiades has stated that reaching agreement with Russia on
contributing to a rescue will be an "immediate priority", though it is unclear
whether any such deal can be struck.
More recently the authorities have become dependent on issues of Treasury bills
to SOEs and banks and available cash reserves. We believe a disorderly default
stemming from the government running out of cash before the June bond payment is
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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