Cyprus’ Undefended Demarcation Lines
Following another ratings downgrade as Fitch’s outlook went negative, Cypriot officials scrambled to scotch talk of joining the EU rescue queue, as the stock exchange yearly fall veered toward triple-digits. Central bank head Orphanides denied bailout resort while admitting “credibility and international market access loss” from fiscal deterioration, while Finance Minister Kazamias hailed “our own problem-solving” with passage of an austerity package of state pay freezes, additional pension contributions, and VAT and dividend tax hikes. Thousands of government workers took strike action in protest as their union boss decried their absence from the table as a traditional social partner. The authorities believe they can halve the budget deficit to meet the Maastricht 3 percent of GDP ratio while restoring growth from the prevailing recession next year. As for bank exposure to Greece that was highlighted as a “weak link” in the IMF’s annual report and comes to EUR 30 billion or 150 percent of GDP, their response has been to prepare a bond for shares support mechanism to cover the current 50 percent sovereign debt haircut under negotiation and future recapitalization needs of the big three affected institutions. However the offshore sector which is quadruple the size is also suffering as Russian depositors in particular look to safer havens amid Eurozone and domestic election turmoil. With the island’s external bond yields in double digits a $2 billion loan was taken from state-owned Sberbank to get through last year, but the same amount is due in repayment in 2012. The EBA has estimated a EUR 3.5 billion hole on bank balance sheets over the period, but analysts warn of deeper trouble under a more severe Greek write-down scenario that could carry over into extensive corporate lines. They note that the main Athens-based groups have already sought emergency assistance under the IMF-EU program and may be nationalized outright, while creditors on the steering committee are facing new demands for 75 percent-range reductions and have hired legal and financial advisers to fight back. The sole hedge fund representative on the main restructuring team resigned in criticism of the desired terms as the timetable for a deal has been pushed into January-February just before fresh elections are scheduled to replace the caretaker administration.
As the 30th anniversary of Cyprus’ partition approaches, relations with Turkey remain stagnant as economic and financial sector imbalances there preoccupy policymakers already in power for a decade and confronting investor charges of complacency and delay. Bond inflows to offset the 10 percent of GDP current account deficit have turned cautious as the central bank intervenes to back the lira. Banks are bracing for a spike in nonperforming consumer loans, and the stock and derivatives exchanges are to be merged and privatized with the goal of forging a regional hub in historically-difficult terrain.
