Malta’s Ambivalent Anti-Crisis Crusade

Maltese bonds and stocks rebounded from immediate post-Cyprus jitters but the offshore center’s struggle was highlighted by the IMF’s annual Article IV checkup flagging “uncomfortably high” public debt and meager growth at less than 1 percent last year. The island’s international banking sector has limited local economy exposure but domestic units are experiencing a construction and real estate nonperforming loan spike. Provision coverage is low and the deposit insurance and resolution frameworks need updating despite solid capital, earnings and liquidity indicators heading into the Basel III regime. The fiscal deficit was 3.5 percent of GDP in 2012 and sustainability will require government worker and health cutbacks and reduced support for state-owned enterprises especially the airline. Energy outlays are another drain and oil diversification should be a priority according to the Fund. Pension changes including a higher retirement age are overdue and the competitiveness model is too reliant on financial and gaming services ignoring productivity and training gaps and potential EU-wide tax harmonization. The report was issued as Cyprus received the first installment of its EUR 10 billion official package after parliament approved it by only two votes. Output will fall double-digits this year and capital controls will stay in place over the summer on the 85 percent debt-GDP ratio. An estimated 60 percent of the surviving big state bank’s uninsured deposits are slated for recapitalization as accountholder withdrawal continues. With tourist arrivals down 10 percent in March, the current account shortfall will exceed 10 percent of national income as the communist party which lost power vows to press the case for euro exit. Slovenia, another small single currency user, spurned the rescue option after raising $3.5 billion in a delayed dual-tranche external bond offer. Ratings agency S&P calculates that the entire amount will be needed to strengthen the trio of ailing banks led by NLB which previously failed an unexacting regional stress test. Moody’s slashed the sovereign grade to junk as over half the citizenry in an opinion poll thought a bailout was imminent. Recession lingers with a 5 percent of GDP budget hole, and the new administration’s plan to sell a handful of public firms to bridge it was greeted with investor skepticism in light of former tries stymied by labor and political opposition.

Greece has already admitted the urgency of further capital replenishment after getting EUR 40 billion for a stability fund, as Alpha and NBG seek private investor backing after a government bond rally bringing 10-year yields to single digits from 30 percent a year ago. Hedge funds have poured into high-yield corporate debt as the lottery operator was divested for EUR 650 million in the “first major privatization” according to the Finance Ministry. A law was finally passed to shed tens of thousands of civil servants to comply with Troika demands releasing scheduled aid as shrinking credit still awaits a white knight.