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Business Cyprus

It’s a default, but not really

By George Psyllides

FITCH Ratings on Friday downgraded Cyprus to ’restricted default’ status following the government’s bond swap procedure, but the finance minister was quick to reassure the public that this was just a technicality and did not mean that the government had gone bankrupt.

According to Fitch, the bond exchange constitutes a distressed debt exchange (DDE), or restricted default. It added that Fitch has downgraded only the affected domestic bonds to “D” from “CCC”, and affirmed the rest at “CCC”.

“It will be possibly recorded as a temporary action of a technical nature until the [bond swap] procedure is completed and it is confirmed that Cyprus has secured its financing needs for the next few years,” Harris Georgiades told state radio.

On Thursday, the finance ministry said it was offering to exchange government bonds with a total nominal value of €1.0 billion, which matured during the adjustment period set by the island’s bailout programme, with five new bonds of equal interest rate and five to 10-year maturities.

The debt is held by banks, most of it by co-operatives, and was maturing in July.

“We should not worry, we should not think the state has gone bankrupt,” Georgiades said.

Cyprus’ action had been welcomed by its lenders.

“The objective of this liability management operation is to facilitate cash-flow management for the government and to ensure adequate funding at terms that support long-term public debt sustainability, an essential step towards Cyprus’ economic recovery,” a statement from the EC and the IMF said. “The transaction is fully in line with the country’s previously announced commitment to roll over €1.0 billion of government debt held by domestic investors at existing coupon rates and extended maturities.”

Georgiades said the lenders’ endorsement was probably more important than any downgrade.

“It was an important chapter in the Cypriot programme and we see that when we achieve goals within the timeframes the lenders’ reaction is positive,” he said.

It also emerged yesterday that the problems faced by the island’s banking sector following a Eurogroup decision to close Laiki Bank and use people’s deposits to recapitalise Bank of Cyprus (BoC), will be discussed in a meeting between President Nicos Anastasiades and European Central Bank (ECB) President Mario Draghi in Frankfurt on Wednesday.

BoC had to absorb certain Laiki assets and was also saddled with €9.0 billion in emergency liquidity debt that the now defunct lender had drawn before it was wound down.

Speaking in Brussels at the end of the EU summit, Anastasiades said that talks will not focus on changing the terms of the island’s bailout, but rather on the ECB’s contribution to problems that emerged after the March decision.

The president said he was confident the forthcoming meeting with Draghi would ensure the BoC’s viability and progress.

At the end of the summit, EU leaders called on the European Council and European Parliament to look into the possibility of providing further financial aid to Cyprus in light of the current economic crisis on the island.

In its conclusions the Council recalled that in February it had recognised the particular impact of the economic crisis on a number of member states within the euro-area which had had a direct impact on their level of prosperity and as a result a number of additional allocations were made from structural funds.

“In February 2013 the macro economic assistance programme for Cyprus had not been decided,” a council statement said, noting that “the government of Cyprus has since addressed a request for additional assistance”.

Meanwhile, the public deficit in the first five months was 0.5 per cent or €80.7 million, compared with 2.0 per cent or €357.9 per cent in the same period last year.

At the end of May, the government had a primary surplus (spending, less income from taxes, excluding interest paid on debt) of around €112 million.

The improvement was mainly due to the rise in non-tax income, which reached 67.3 per cent, or €479.2 million, and the 8.6 per cent drop in public spending.

Revenues in the first five months reached €2.5 billion, a 1.29 per cent rise, compared with €2.46 billion in 2012.

Tax revenue however, recorded a significant drop as the recession deepened.

It dropped 6.72 per cent to €2.03 billion compared with €2.17 billion in 2012.

Income from direct taxation dropped by 2.86 per cent to 725.6 million while income tax revenues fell 22.33 per cent to €328.9 million compared with €423.4 million in the first five months of 2012.

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