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EU bailout request by end of June

As Cyprus scrambles to announce a new package of austerity measures, some pundits predict that a request for a bailout from the EFSF may be imminent saying this could happen by the end of June.

CYPRUS looks increasingly set to become the fourth euro-zone country to seek financial aid under the European Union’s temporary bailout fund, as early as this month, as it scrambles to protect its banking system from Greece’s widening financial crisis that is threatening to engulf its tiny island neighbour.

The fallout from the Athens crisis already has forced Cyprus’s second biggest bank to seek government support for a planned multibillion euro recapitalization, something that will push the island’s public finances deep into the red and cause it to miss this year’s budget targets.

Cyprus – faced with soaring bond yields hovering around 14% on the 10-year bond, and with its debt considered junk status by two of the world’s leading ratings firms – has few places to turn to cover its financing needs.

Officially, the economy is expected to grow 0.8% this year, according to government projections, but the International Monetary Funds says a 1.2% contraction is more likely.

Late last year, the country negotiated a €2.5 billion bilateral loan from Russia. Now, Cyprus is in talks with China for another bilateral loan, of an undisclosed amount, that looks unlikely to materialize in time.

In the past few days, Cypriot officials have been preparing public opinion by hinting that a bailout from the European Financial Stability Facility may be imminent, but without saying so directly. Finance Minister Vasos Shiarly told state-owned radio last week that “avoiding the EFSF is our No. 1 priority.”

Cyprus also is scrambling to announce a new package of austerity measures within the next 10 days, amid signs of disagreements within the government over the scope of planned cutbacks. Parliament will soon vote to adopt Europe’s new fiscal pact.

Those austerity steps will likely weigh on the island’s already fragile economy, but are seen as necessary to restore confidence and head off any deeper cuts that Cyprus’s euro-zone partners may demand in exchange for a bailout.

“Cyprus is starting to feel the effects of the Greek crisis and may have no other recourse but to ask for European aid,” says Alex Apostolides, an economics professor at Nicosia’s European University. “There has been a narrowing of all other options that were available, to the point where going to the EFSF looks increasingly likely, almost inevitable.”

Cyprus’s parliament recently approved a plan to bail out No. 2 lender Cyprus Popular Bank, after it wrote down some €2 billion from Greece’s recent debt restructuring.

The rights issue, which will be underwritten by the government, is due to kick off June 15 and last about two weeks. With private investors unlikely to cover the full sum, the plan creates potential liabilities of €1.8 billion for the state, which in Cyprus’s tiny economy, could translate into a budget deficit of more than 10% of gross domestic product – four times this year’s target.

The sums involved aren’t likely to strain Europe’s rescue fund. Even after bailing out Greece, Portugal and Ireland, the EFSF still boasts a war chest of about €250 billion. But a financial rescue for Cyprus would come as another reminder that Europe’s leaders have failed to stop Greece’s crisis from spreading.

Any Greek exit from the euro could have unpredictable consequences on Cyprus—possibly collapsing its banking system and dragging it out of the common currency as well.

The island’s geopolitical significance in the eastern Mediterranean has been growing with the discovery of large gas reserves. Those gas reserves could provide Cyprus with badly needed revenue, but would take time to fully exploit – about five years, according to some government estimates. In the meantime, investor interest could sour.

Cyprus is closely linked to Greece through the exposure of its banks. The three largest Cypriot lenders, Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank, are heavily dependent on the Greek market, in which their retail operations boosted profits the past few years.

As Greece’s economy has tanked, Cyprus lenders, like their Greek counterparts, have seen nonperforming loans soar. Those are now hovering in the neighbourhood of 20%.

Deposits are another worry: Cypriot banks have generally benefited from Greece’s two-year-long outflow of capital, but prospects of a sudden Greek exit from the euro may test depositors’ confidence.

Some already are leaving. In the past two weeks, Cyprus’s lenders have been offering teaser rates to keep depositors locked in, with some banks boosting deposit rates to as much as 6.5% for certain time deposits.

Cyprus’s banks are relatively well positioned to weather the storm, said George Vasiliou, a former president of Cyprus, now an economist and businessman. But a Greek euro exit could change that: “The main concern from a Greek exit would be the loss of confidence among foreign depositors and investors, which might become a self-fulfilling prophecy,” he said.

Meanwhile, higher interest rates and shrinking bank lending volumes is starving the economy of funds just as Cyprus is struggling to shake off the effects of a continuing downturn. A deadly munitions blast at a naval station in July knocked out half the island’s power production and helped send the economy into recession.

Concern among the island’s 800,000 inhabitants is growing. Since April, consumer confidence has plunged, slipping 13% compared with the previous month, while business sentiment in the island’s all-important services sector is down 22%. Joblessness is close to 9% – edging record highs.

Cyprus is facing a “race against the clock,” said Mr. Vassiliou. “The constitutional amendment implementing Cyprus’s obligations under the fiscal compact—that will close the door to new deficits—will be crucial, as will a new fiscal package in the order of €200 million. What matters is for Cyprus to regain its trustworthiness among foreign observers.”

This article was first published in The Wall Street Journal.

Readers' comments

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  • Odd_Job_Bob says:

    Nigel highlighted for us the Nov 2011 IMF paper on Cyprus: http://www.imf.org/external/pubs/ft/scr/2011/cr11332.pdf which states:

    “further analysis would be needed to determine if assets classified as liquid would, in fact, prove to be so in a crisis situation”.

    This is Greenspeak for, “Cyprus is lying to us. Assets deemed recoverable are not. We can’t be ar*ed yet to look into it, but that day may come”.

    We must remember though that, in economists circles, the IMF are like the Horsemen of the Apocalypse: when you see them coming, it’s already too late!

  • Simon Edwards says:

    It is tricky guessing the big number, we know roughly about the vacant property numbers but there is also debt on sold property which is actually often double because the owner & developer have a mortgage. Also we have been told that the high end of the property market is still buoyant. These properties have massive price tags, they were possibly built on loans sold and then re-mortgaged. Also I have worked here in the architecture business and have had an insight into the gossip of this sector. Some of the bigger names in development have debts into the 100’s of millions. The true figure will no doubt be larger than estimated.

    The banks by not proceeding with re-possessions are kidding themselves at some point they will cut their losses it’s just that the collateral is not going to cover the numbers but unless they make a decision soon they are at risk of losing more. It’s time to come clean on many levels and show the non performing loans rather than keep rolling them over. The IMF will find all…….

  • Odd_Job_Bob says:

    Nigel, I’m on holiday, so OF COURSE I’ve been at the G & T’s again!

    The 1.2m unsold properties was an “unofficial” quote given to me about a year ago through a VERY GOOD SOURCE. I reckon it’s clearly on the high side, but the exact figure I’m afraid is unlikely to ever be known.

    I also agree with Denton that the doom and gloom merchants, even though probably correct, will have to admit that, much in the way of Argentina, the ill effects of defaulting on impossible (although completely self-inflicted) international debt and jettisoning a straight-jacket currency doesn’t last forever. Indeed, this is exactly what Cyprus should do.

    In the country where I am now, the EU-appointed fixer in chief has done a u-turn on the people who appointed him to set the books straight and is now begging for Eurobonds. The ONLY reason he’s doing this is because, after seeing the books, he knows that there is NO WAY AT ALL an EU bailout, even with the tremendously draconian measures he’s putting in place, will save his country.

    So, writing’s on the wall for Cyprus. It has been for a good while now. Good news though is that the bad times won’t last forever.

  • janner says:

    I tell anyone who will listen not to go near Cyprus with a barge pole! I don’t have a huge knowledge of what the issues are but I tell people to look at Nigel’s website and do their research.

    When I try and explain the title deed issue to others they struggle to get their head around it. It really is an amazingly ridiculous situation. As I have said before, it’s all coming to a head as eventually liquidity needs to be tested and the sums just don’t add up for poor old Cyprus. What a shame that the powers to be have ruined it.

    It was so unnecessary as Cyprus truly is a wonderful place. Let’s hope one day it can return to its former glory but this will not and cannot happen unless all the bad is stripped away, no hiding, just the truth!

  • sam london says:

    If Greece leaves the Euro then Cyprus will be left in an awful situation as along with the loss of loans its banks made to Greece its tourist industry would be devastated. This is because everyone I know will holiday in Greece where because of leaving the Euro holidays and property etc will be so much cheaper.

    Cyprus has lost its competitiveness for tourists who also complain about its poor accommodation and overall holiday experience. Without a competitive tourist industry and with a now recognised internationally corrupt housing market I believe that this beautiful island is in for a prolonged period of poverty.

    I was at a recent international property buyers convention in London, and Cyprus came virtually bottom as a location to invest in due to ongoing problems with title deeds and corrupt developers. Also at the convention there were a number of ex pats who have bought on the island warning anyone of investing there. This group seemed to be very well organised and their campaign is having a massive effect on people I know who would have considered investing there.

  • Pavlos Loizou says:

    @ Nigel Howarth (Comment on: June 5, 2012 at 12:03 am)

    Property transactions as recorded by the Land Registry are divided into “title deed transfers” and “sale & purchase agreements” and are reported separately. Typically, these have been about the same/equal over the past few years.

    Since 2000, there have been circa 175,000 “sales & purchase agreements” deposited, which would imply a total of circa 350,000 transactions.

    If we assume (without hopefully making an “ass (of) u (and) me” that circa 60% of these were/are apartments and houses (this is based on the research carried out by leaf Research – “Project RED”), then total transaction volume of housing units since 2000 was 210,000. This represents about half of the housing stock in Cyprus, as reported by the 2011 Census (432,736 housing units were recorded).

    As for the article itself, I would like to “reveal” that since 2009 we have has an office bet as to when (not if) Cyprus will seek external assistance.

  • Denton Mackrell says:

    It’s a bleak prospect, no doubt about it. But absolutist, dogmatic positions at either end of the spectrum (utter gloom and doom and exuberant, blind optimism) are both misleading, even though they are good for debate. At present, Cyprus properties continue to sell but at a v low rate. Agreed sale prices are typically down by 35-50% of their ‘former glory’. I know of some. You may also have seen the recent billboard ads along the motorway near Paphos from a well-known developer offering ‘two for the price of one’ apts.

    Thus, Cyprus properties do still have a value because transactions still occur. Come Apocalypse Day (euro exit etc) and the immediate effects, it may well be that literally all property transactions stop and then book values really will be just notional. But for how long?

    History shows that, following national disasters of all kinds, business re-starts quite quickly. Wherever there are people, there is always trade and transactions even at the darkest hour. With property, it may take weeks and months but re-start it surely will. The unknown now is the likely pricing then. In the early stages, prices are bound to be depressed and probably significantly less than current. But markets and prices always find their own level eventually.

  • @Odd_Job_Bob – 1.2 million! Have you been at the gin & tonic again?

    Bearing in mind that over the first decade of the millennium a total of 48,808 properties were sold, 1.2 million is nearly 25 years supply of housing stock.

    I believe the number to be MUCH closer to 20,000. Mind you, the way things have gone since 2009, even that is more than 3 years supply!

  • Odd_Job_Bob says:

    20,000 housing units unsold! Gitouttatown! You can virtually SEE that number in Limassol alone! I heard the figure of about 1.2 m a year ago, but there is only one way of knowing (and we’re never going to be told that, that’s for sure).

    There is only one way of knowing the amount of developer debt as well (somewhere in between the joke figure of 5bn and even I admit probably a way too high figure of 150 bn), which is when the new EU appointed-Cyprus President steps in and spills the beans a la Grecque, as a condition of the bail-out.

    However, we ALL KNOW that any austerity measures he would even think about introducing will never be accepted here, so, basically there will be no bailout. Plus, Germany’s not playing that game any more.

    The one thing on which I agree with Alex though is that all this is transpiring NOT through the work of stupid people, but of very clever, greedy people who saw the opportunity to line their pockets (with EU money but we won’t go into that again…) and then clear outta town. This exodus to Mayfair (I doubt it though, more like Kensington – Mayfair’s been taken by the fleeing rich Arabs!) will arrive pretty soon.

    What will be left will be the wasteland as previously described by myself and others on these very pages. This wasteland won’t last forever though and in x years time, once all the property has been repossessed, many have gone bankrupt, topped themselves or escaped wiser but considerably poorer, many changes of government, natural resources finally able to be exploited and hopefully Turkey hopefully NOT being allowed to clean up the mess (again, no need to go into the growing influence of Turkey in the area re: Syria and then Iran etc), the EXACT SAME PEOPLE WILL BE BACK buying up all the repossessions that haven’t crumbled into the ground.

    If you think buying opportunities in Cyprus exist in the at least next 10 years, go right ahead!!!

    This reading the future stuff is easy…

    PS. If you’re asset manager has been telling you to get out of cash and invest in property over the last 50 years, you should really be looking at changing your asset manager.

  • Denton Mackrell says:

    6bn euros of developer debt was what Stock Watch estimated in 2009 from government data. Most analysts have since taken it as on the low side. A recent estimate posted on this site (with assumptions stated) put it at 10bn. My accountants also recently gave me their own estimate of 10-12bn.

    The recent NYT article on the Cyprus economy included analysts’ estimate of the total indebtedness of Cyprus of 152bn euros or some 8 x GDP. I believe Nigel has repeated this somewhere and commented.

    The Cyprus banks’ exposure to Greek bonds/debt plus their other debts plus individual citizens’ and company borrowings plus govt debt all contribute to the 152bn.

  • andyp says:

    Did anyone notice the first name of the new Governor of The Central Bank?

    Panicos.

  • Alex says:

    I’m in tense anticipation of EU bail-out. This is our only hope to get a team of qualified psychiatrists for this Bedlam.

  • Alex says:

    @Janner,

    150 Billion is definitely untrue.

    If an average housing unit on the island is worth, say, 150,000 EUR, you would need to build 1 Million of those units to justify the figure of 150 Billion. AS far as I remember, the total number of unsold housing units is somewhere around 20 thousand.

    The problem with the words we use to describe local politicians is that they don’t care a ___t. We may call them whatever we like, but they are still sure they are supermanagers and fathers of the country.

    My Cypriot friends assured me, for example, that there is no legal way to remove the president from power. Only if HE chooses to leave. And with only 4 weeks before the limelight he has dreamed of for so long, he would definitely NOT leave.

  • A question on this subject has recently been raised in the European Parliament:

    Question for written answer E-004989/2012
    to the Commission

    Rule 117
    Eleni Theocharous (PPE)

    Subject: The economy of Cyprus

    On the basis of the obligations undertaken by the Republic of Cyprus, the fiscal deficit must be reduced from the 6.3% of GNP that it is today to 2.5%. It is estimated that by 2013 the public debt will have risen to as high as 78% of GNP.

    Does the Commission believe that the Cypriot Government should take fiscal discipline or other measures and, if so, which measures? Is there a danger, on the basis of the data that the Commission has at its disposal, of Cyprus entering the support mechanism?

  • @Janner – the developers’ debts have been estimated at €6 billion.

    Where did you see it reported at €150 billion?

  • Janner says:

    Alex,

    Your comments about the level of developer debt being 5 billion is at odds with other reports stating it is around 150 billion. A huge difference, but which is correct? Something is coming to a head but we don’t seem to be able to agree what is coming to a head let alone how to deal with it. I did use the word ‘stupid’ to describe leaders of Cyprus in an earlier post but as you have correctly pointed out, they are not. Maybe I was doing them a favour with that description. There is another word….it’s on the tip of my tongue…..!

  • Alex says:

    6. There will be an obvious slump in the construction, of course, but I assume most of the workforce employed in the sector is non-Cypriot and hardly pay any taxes (not their fault, but developers’ greed). Therefore neither Cypriot workforce nor the government will lose much. And as for developers, I do not think they deserve sympathy. FINITA

  • Alex says:

    5. Bail-out is the most desirable outcome, because the problem here is not REVENUE, but EXPENDITURE. As soon as government sector is put under control, even the current income flow would be perfectly adequate. So, 10 billion EUR from EU + 10% cut in government spending in return and things will start improving. I don’t think these 2 measures will force civil servants to starve, while private sector will not be adversely affected.

  • Odd_Job_Bob says:

    I’m on hols at the moment but couldn’t help myself from logging on, you know, to check in. Can only write briefly (phew, I hear the sighs of relief).

    Denton, the person you were talking to is completely and totally off his trolley. Valueless equals Valueless, not 50% of something of (some, although debatable) value.

    Steve, prices in Cyprus to go UP with tons of people heading for the exits? Tee tum, tee tum.

    Meanwhile, from a man who KNOWS, read this: George Soros says Germany has three months to save the eurozone

    Does anyone think that, with all the mounting pressure, Angela Merkel has seemed surprisingly calm recently? Word on the street where I am is that production of Euromarks, with presses bought in England and production in Switzerland is well under way…

  • Alex says:

    4. Local banks have already written off 76% of Greek bonds, so another 24% will not make a huge difference.
    Tourism is NOT the major source of income for the country (10% of revenues). And the numbers of tourists are stable. Should EUR further depreciate against sterling, the island will be even more attractive. Egypt will not recover any time soon and Greece is not a competitor.

  • Alex says:

    1. Exposure of local banks to developers is not that bad. After all, there ARE some tangible assets behind those loans. The problem is banks are reluctant to take possession of mortgaged property, correctly believing that throwing all that stuff to the market will immediately depress the prices. However, sooner or later they will have to do that in order to survive.

    This may actually revive the property market on the island. This would also benefit the state as it is better to get 1.5% fee on 80,000 EUR property rather than nothing on 200,000. The problem, however, will be social: until now we have only seen Cypriots using/abusing credulity of foreign buyers/investors/workforce.

    From now on it will be a battle between Cypriots for the limited resources, probably for the first time in decades. With a gun in every house it is a grim prospect.

    2. Those who governed the island are not stupid. They live in mansions and have considerable wealth. If something goes wrong here, they will simply relocate to Mayfair. We, the people, are stupid, I am afraid.

    The amount owed by developers is about 5 billion. The value of relevant mortgaged property is at least half of that and about 0.5 billion is probably accrued interest on the loans. So, if the banks forego interest and sell off all the property, they stand to lose 2 billion maximum. They can well manage that, since it is spread more or less evenly both in time and space.

    3. Cyprus will never be in the same situation as Greece. Tourist services have always been much cheaper in Greece than in Cyprus, yet Cyprus competed very well. I suspect one of the reasons was British preference in choosing destination. Therefore Greece is not a competitor for Cyprus in tourism. Turkey and Egypt are.

    Political situation in Cyprus is precisely the opposite: they can ALWAYS form a government here. Two major parties control most of the seats and there is no way any other party can challenge them. Therefore there are only slight variations at the very top. As a result, any significant change is inconceivable. DIKO and AKEL comfortably divide the spoils, giving a ministry or two to smaller parties, to guarantee their complacency. All that heated debate is for TV audience only. Look at what they want to do now: being aware that Christofias in unelectable, they try to agree beforehand on a mutually acceptable candidate. Which means there is no actual political struggle at all. Guys at the top simply chose a man that would be palatable for the population in order to continue in the same old way.

  • Steve says:

    Over the last 50 or more years of currency devaluations and deflation alternating with high inflation, the financial advice has remained pretty constant. Get out of cash and into suitable hard assets, such as property. Devaluation of the Cyprus currency may result pretty quickly in property price increases to make up the deficit, especially if many sellers are aiming to leave the island and return home, where they will be trying to purchase property with non-devalued currency.

  • david cunningham says:

    cyprus outside euro at mercy of turkish misbehaviour would be a riskier investment than a greek bank

  • Denton Mackrell says:

    Someone suggested to me today that perversely a eurozone exit by Cyprus on the coat tails of Greece might be a blessing in disguise. Cyprus’ new currency (old Cyp pound revisited??) would probably be only worth some 50% of current Euros in purchasing power. However, property prices would also be halved vis a vis hard currency, thus making them hugely attractive to overseas buyers. This might, he argued, revive the Cyprus property market. Euro exit might thus be a longer term blessing for Cyprus.

    I’m still pondering. Anyone else got a view on this?

  • david cunningham says:

    If Greece exits Cyprus is FINISHED its banks exposure to 100% Greek default will destroy ALL its banks its main income tourism would have to compete with a half price Greek tourist business their banks are terribly exposed to Greek business loans which will never be repaid currently income tax is levied at starting point of 18,000 pa whilst most Euro is at 10,000pa they will very soon be in the same situation as Greece UNABLE TO FORM A GOVERNMENT Spain and Italy in same position for different reasons EVERYBODY BETTER PRAY GERMANY HAS ENOUGH MONEY AND IS PREPARED TO RISK IT TO KEEP EUROPE FROM TOTAL COLLAPSE.

  • Mike says:

    Should all this come to pass it was predicted long ago by a great many commentators on this and other forums. Why I wonder not by those elected to run the Country.

    A friend mentioned to me that the reason comes under the generic heading of a yet to be adopted word of Ineptocracy, defined as:

    A system of government where the least capable to lead are elected by the least capable of producing and where the members of society least likely to sustain themselves or succeed are rewarded with goods and services paid for by the confiscated wealth of a diminishing number of producers.

    Ring any bells?

  • Janner says:

    If the EU provide bailout money to Cyprus without changing its ways will be as good as just throwing the money away. Cyprus has a model which is simply broken. The major factor, as pointed out by many others, is not the exposure to the Greece problem but its own property problem. The amount owed by developers is huge and they have buried their heads in the sand hoping it will all go away. If the EU don’t see this then they are as stupid as those who have governed Cyprus over the past few years and deserve everything they get…..which will be a big fact zero return on the money they lent!

  • Gavin Jones says:

    The salient word in this article is contained in the final sentence: “Trustworthiness”. And this applies to any organization be it a country or a small business.

    As a result of the ineptitude and inaction of the Christofias administration and the unethical behaviour of certain developers, banks and lawyers, Cyprus is on its financial knees.

    Let’s look at some of the facts in relation to Cyprus’ bailout requirements.

    The losses incurred by Cypriot banks on their holdings of Greek government bonds look a mere drop in the ocean in comparison to the rest of their loans. Michael Sarris, Chairman of Popular Bank, stated on BBC Hardtalk recently that his bank’s exposure of €13 billion in loans in Greece was “doubtful”.

    Then there’s ALL the banks’ exposure to Cypriot developers? With this amount also running into billions of euros this too is more than likely “doubtful”.

    And what about the bloated public service which is haemorrhaging money by the hour?

    EU bureaucrats might have to bite the bullet and “trust” the above motley crew with more money. Would you?

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