Cyprus’ Foreclosed Recovery Chances
Cyprus bond prices firmed after proposed foreclosure laws still favorable to borrowers to handle the 75 percent bad construction loan ratio were overturned by the courts to release the delayed $450 million international rescue installment. The IMF has expressed doubts about reform commitment against “entrenched political interests” although ratings agencies have recently upgraded sovereign readings. Economic contraction will be 3 percent this year and could worsen with the onshore banking collapse and skittish offshore flows reflecting the Russia-Ukraine mess. Nonperforming assets are equivalent to almost 150 percent of GDP and private capital raising can succeed only with buoyant European high-yield conditions and residual appetite from Greek offerings which may fall short of meeting ECB stress-test holes even with $15 billion in leftover official facilities from the original crisis program. The stock market has been the worst MSCI regional performer as the Troika puts the financing gap near EUR 15 billion in 2015 which would be covered commercially under Prime Minister Samaras’ exit timetable. Growth then could be in low single digits for the first time since 2008 on budget balance according to the European Commission, but snap elections could bring the Syriza opposition party to power which has vowed to repudiate the accumulated debt load and reverse austerity steps. In Portugal, another stock market laggard, the IMF and EU have slammed results since the May finish with reform stalls and increased public and private debt at a combined 130 percent of GDP level leaving aside the costs of the BES cleanup and transport support. The duo questioned 2015’s 1.5 percent growth target as the biggest bank Millenium BCP failed the asset quality review under the supervisors’ adverse scenario. Italy and Spain were the major core member worries but only one small lender was deficient in the former as deflation deepens. Political risks abound as a third party alternative Podemos has emerged to challenge the establishment and an indicative Catalonia referendum showed 80 percent for secession in the industrial bulwark. Italy’s Monte dei Paschi was EUR 2 billion shy of standards and still owes the state from a previous bailout. Recession has lingered under Prime Minister Renzi, who attacked excess deficit procedure rules and then agreed to eliminate planned individual and small business tax relief to come in under 3 percent of GDP. Bank lending has declined since 2012 and labor market changes continue to confront stiff resistance by the populist Five Star movement which also aims to abandon the euro.
France likewise submitted last-minute adjustments to keep within range of the threshold although ruling socialist party lawmakers abstained from budget votes. The far-right National Front is ahead in opinion polls as former President Sarkozy resurfaced to claim the mainstream opposition mantle even though he is under multiple corruption investigations. After speculation that Commerzbank would flunk German banks were also cleared by the stress test as Chinese and Russian weakness hurts machinery exports in particular to possibly later expose gearing.
