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Troika officials tone down Georgiades’ optimism (Updated)

Finance Minister Harris Georgiades has rejected the idea that there is an alternative to borrowers having to repay their loans to banks.

Georgiades who was talking to delegates at the Economist annual conference in Nicosia said that “what we must guard against is a populist pressure that loans can vanish without some having to pay the bill”.

“Let me say clearly that someone always pays the bill,” he said.

Georgiades added that Cyprus, which is scheduled to exit its programme in March, will not seek an extension of its programme after restoring market access with its third debt issue a week ago, or request a credit line.

But a Troika official unofficially voiced concern at Georgiades’ exuberance, because Cyprus’ bonds are still rated as junk – i.e. non-investment grade – and the country’s participation in the quantitative easing programme would thus require European Central Bank (ECB) approval.

Such a decision would be difficult, he said, unless one of the four rating agencies upgraded Cypriot bonds to investment grade.

The official pointed out that the inclusion of Cyprus in the ECB’s quantitative easing would also be possible if Cyprus requests a credit line post-bailout programme – essentially a financial support programme linked with milder conditionality.

The same official also discarded the idea of setting up a government-funded asset-management company – a ‘bad bank’ – as repeatedly proposed by DIKO leader Nicolas Papadopoulos.

Setting up a bad bank with government money to tackle the high stock of non-performing loans in Cyprus would require a second bailout, he said.

With NPLs currently amounting to 150 per cent of Cyprus` GDP, and with Cyprus` public debt so high, the government could not borrow from the markets to fund the bad bank, and therefore the government would have to resort to a new bailout, he explained.

Georgiades told the conference that the government does not intend to use the remainder of the €10bn in bailout funds made available to Cyprus in exchange of reforms.

Cyprus has received around €7.1bn in bailout funds since March 2013.

Klaus Regling, the managing director of the European Stability Mechanism, who was also keynote speaker at the conference, ruled out an alternative use of the remaining bailout funds, which are made available to Cyprus below market rate, and allow significant savings for the Cypriot government which has accumulated a debt to gross domestic product ratio of 108 per cent in 2014.
Using the remaining funds for other purposes would be “outside the mandate” of the ESM and would run counter to existing eurogroup decisions, he said.

Regling said that the euro area, following the implementation of structural reforms and fiscal consolidation efforts, is in much better shape to withstand future crises while Cyprus was successful in turning the page. He also described Cyprus as the euro area’s fourth success story, after Ireland, Portugal and Spain.

The Cypriot finance minister said that Cyprus was also able to restore confidence in its economy after it lost access to international markets in 2011 and said that the government will “maintain its reform pace,” efforts to consolidate its public finances and reduce non-performing loans to achieve further reduction in its borrowing costs.

“What I found encouraging was that some at home thought that the pricing was high and I agree,” he said.

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