Cyprus Mail

Programme exit to have “negligible” impact on banks’ liquidity

Cyprus’s exit from its adjustment programme, with the country’s rating still well below investment grade, will have a “limited” if not “negligible” impact on the liquidity of its banks as demand for loans remains low, bankers say.

With the termination of the programme next month, Cyprus is still rated by all three rating agencies as “junk”, and given the government’s decision not to request an extension of the programme, or a credit line, Cypriot banks may have to return around a total of €140m in liquidity to the European Central Bank, as the currency issuer’s “waiver will be lifted”, a banking source said. “The impact will be negligible”.

The waiver allows private banks to tap liquidity directly from the ECB using non-investment grade rated government securities, provided the issuing government is in a programme of the European Commission, the ECB and the International Monetary Fund.

Cypriot banks, with 46 per cent of their portfolio classified as non-performing, will still be eligible to use Cypriot government bonds to request liquidity. “However this will be provided in the form of emergency liquidity assistance,” the source added.

The Cyprus Business Mail understands that Bank of Cyprus, which reduced its outstanding ELA to €3.5bn in January, which is one third of what it was in April 2013, largely inherited from defunct Cyprus Popular Bank, or Laiki, does not expect any impact on its liquidity from the completion of Cyprus’s programme.

The liquidity of Cyprus’s largest lender does not depend on Cypriot government bonds as it taps liquidity from elsewhere, a source said. In December, the government fully repaid the remaining €340m of a bond it issued to recapitalise Laiki in 2012 which, according to a Bank of Cyprus source, limited its exposure to the Cypriot government to below €0.5bn.

Yiannos Stavrinides, head of head of strategy and communication of the Cooperative Central Bank, said that the programme exit would affect all banks, “unless it comes to some kind of adjustment before or right afterwards so that Cypriot bonds can be accepted by the ECB” as liquidity indicators.

“We will see the liquidity ratio drop,” he said in a telephone interview, adding that this would still not affect the bank’s liquidity as it relies on other liquidity sources, including deposits.

Antonis Rouvas, Hellenic Bank’s chief financial officer said that while the bank will have to monitor the situation, “it is a positive development that we are exiting the adjustment programme, which is an indication that the economy is on a recovery course”.

The Cooperative Central Bank’s exposure to Cyprus government securities on September 30 was below €1.3bn, while that of Hellenic was €327.6m.

Cyprus’s economy which is expected to have expanded around 1.5 per cent in 2015, after contracting 2.3 per cent in 2014, is forecast to grow 2 per cent in 2016, according to the finance ministry. Cyprus, which is rated two notches below investment grade by Standard & Poor’s and four notches into the junk area by Moody’s Investors Service and Fitch Ratings, is expected to complete its programme without satisfying the last remaining requirement, the approval of the establishing of CyTA Ltd, a step towards the privatisation of the state-owned telecom.

“It would be wiser if Cyprus exited the programme with government debt rated investment grade for the purpose of tapping liquidity,” Alexander Michaelides who teaches finance at the London-based Imperial College said.

Michaelides, who also served in the Central Bank of Cyprus’s board of directors in 2013, added that without a programme and with a junk rating, Cyprus may not be well prepared to face a probable negative shock to the economy.

A Cypriot banker who spoke on condition of anonymity said that he does not expect the ECB to willfully destabilise the Cypriot banking system three years after the latter dealt with an unprecedented banking crisis with uninsured depositors at its two largest lenders losing money.

“There is such a risk,” the banker said, in reference to the Cypriot banking system’s exclusion from the ECB’s monetary operations as a result of the slow progress of reforms that would allow Cyprus to regain its investment grade rating faster.

“Reforms have not been extensive enough to help us deal quickly with the non-performing loan problem,” the banker said. “The foreclosure and insolvency legislation they gave us is toothless”.

Cypriot banks have come under pressure by the supervisor in Frankfurt to increase their provisions to reflect the portion of bad debts in their portfolio.

The co-ops, in November, announced debt writedowns worth €527m, prompting them to request an additional capital injection of €175m from the government after receiving €1.5bn in 2014 in order to comply with capital requirements, while Bank of Cyprus said on Tuesday that it had also increased its provisions by as much as €600m.

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