Junk-rated Cyprus’s decision to complete its adjustment programme “cleanly,” i.e. without the safety of credit line, means that Cypriot securities will be subjected to the European Central Bank’s rules and as such ineligible for the currency issuer’s purchase programmes, an ECB spokesperson said.
The “lifting of the waiver” and the “loss of the eligibility for the public sector purchase programme are a consequence of collateral rules and the end of the programme,” the ECB spokesperson said in an email in response to a question.
As a result, Cyprus’s government bonds will be ineligible for the ECB’s €1.5trillion expanded asset purchase programme, also known as quantitative easing, after it already purchased about €285m of Cypriot government securities.
A source familiar with the situation said that while the lifting of the waiver, which makes securities rated below investment grade eligible also for the ECB’s monetary operations while a country is in a programme, should have “contained” consequences for Cypriot banks “as they have improved their funding positions over the past few quarters”.
A banking source said on February 5 that Cypriot banks would have to return around €140m to the ECB following the lifting of the waiver.
Cyprus’s sovereign highest rating is a BB- by Standard & Poor’s which is three grades below investment grade. The B+ and B1 rating assigned by Fitch Ratings and Moody’s Investor Service respectively is four notches below investment grade while that assigned by the Canadian rating company DBRS is B, which is five grades into junk.