By Angelos Anastasiou
THERE has been no haircut on Cyprus sovereign debt by the European Banking Authority (EBA), the Central Bank of Cyprus (CBC) said in a written statement on Friday.
It was refuting a “completely misleading” report by local daily Simerini that claimed the European Banking Authority had decided a 16.5 per cent ‘haircut’ on the value of Cyprus sovereign debt held by three Cypriot banks – Bank of Cyprus, Hellenic Bank and the Co-operative Central Bank. The debt write-down, the paper said, would incur additional capital requirements for the three banks totalling €450 million.
Simerini’s claim even prompted public remarks by DIKO leader Nikolas Papadopoulos, who asked CBC governor Chrystalla Georghadji to clarify the matter in a scheduled meeting between the two.
“The Cyprus sovereign will not be subject to any haircut, this is just part of the adverse scenario of the EBA’s stress tests,” he said after the meeting. “There is a differentiation with regard to the adverse scenario and presumably a write-down will indeed be calculated, in the case of Cyprus at 16.5 per cent of face value, simply for the purposes of the stress tests.”
The CBC was swift in responding to the article, saying the paper’s reports relate to the methodology formulated by the EBA for the adverse scenario of the stress tests.
“It is pointed out that this refers to the level of hypothetical losses that will be estimated merely for the purposes of the stress test,” the CBC’s statement said. “This specific parameter [of sovereign debt write-down] will apply to all EU countries and all banks that hold government bonds in their books at nominal value. The write-down level is based on each country’s credit rating.”
The Public Debt Management Office was also unequivocal in dismissing the claims made in Simerini’s piece.
“This decision in no way affects the nominal value of government bonds or investors’ rights,” the Finance ministry department said. “It must be noted that Cyprus’ government bonds are protected by relevant legislation that tie the repayment of public debt with contractual obligations resulting from the issuance of government bonds. It is reminded that the Republic of Cyprus has never defaulted on its public debt obligations.”
The stress tests are carried out by the EBA, in coordination with the ECB, in preparation of the assumption of supervision of banks across the Eurozone at the end of the year. Stress-test results are expected in October 2014.
Under the stress test parameters as laid out by the EBA, in order to pass banks must show that their core-tier 1 capital ratio will not fall below 5.5 per cent in a severe economic crisis – the adverse scenario – and 8 per cent under normal circumstances – the baseline scenario.
As Georghadji clarified at a news conference on Wednesday, banks will have to cover capital shortfalls under the baseline scenario within six months and nine months under the adverse scenario.