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Cyprus Economic Growth

Better than expected fiscal performance may render troika funding unnecessary

A better than expected post-bailout economic and fiscal performance for Cyprus compared to initial estimations is likely to leave a significant portion of bailout funds unutilised by March 2016 when the financing period expires.

The government has so far received 6.1 billion euros from the European Stability Mechanism and the International M.F up until December, compared to the 10 billion euros total allocated by international lenders agreed, March 2013

With the amount of 1 billion euros earmarked for the recapitalisation of the cooperative banks put aside as unutilised after the Cooperative Central Bank successfully completed the ‘stress test’ asset quality review in October, the government may still borrow up to 2.9 billion euros from international creditors in the next 13 months at more favourable terms compared to market conditions.

Finance ministry of Cyprus forecasts a primary fiscal surplus this year, which will further decrease the country’s financing needs either through new borrowing or budget cuts. The cost of borrowing from the international creditors is 2.5 per cent (year) compared to the 4.85 per cent yield of 750 million euros five-year bond issued by the government in June.

The balance is the difference between government revenue and spending excluding interest payments on government debt. Cyprus posted a 0.1 per cent of gross domestic product fiscal surplus in 2014, compared to an initial deficit forecast of 4.25 per cent of the economy.

This year, the economy of Cyprus is expected to grow 0.4 per cent, after shrinking a projected 2.3 per cent last year, compared to a 4.2 per cent initial forecast. In 2013, the year in which the bailout was agreed and recapitalised Bank of Cyprus with almost half of uninsured deposits to equity and its merger with failed lender Laiki Popular Bank, the economy shrank 5.4 per cent compared to an 8.7 per cent.

Considerations related to the degree to which market access is restored or to the cost of borrowing could encourage the government to consider such a decision, Clerides told the Cyprus Business Mail, as borrowing 1 billion euros from the troika at a 2.5 per cent rate could save taxpayers more than 20 million euros a year in interest payments.

Greece’s - Syriza government under prime minister Alexis Tsipras is seeking to renegotiate the terms of the country’s bailout which led to a direct confrontation with the rest of the euro zone. The Cypriot parliament suspended on December, an unpopular law aimed at speeding up foreclosure procedures in order to help banks lower their non-performing loans which make out around half of their loans portfolio.

Opposition parties justified their vote over the government’s delay in submitting a draft framework on insolvencies which would give debtors a safety net. The troika subsequently froze Cyprus’s financing.

Cyprus could re-establish market access “significantly sooner than the expected period of mid-2016”. The minister added that such a development would not imply a “premature end” of the economic adjustments programme agreed with international creditors.

“Markets want to get their money back,” Clerides said. “They do not lend to you based on conditions or memoranda of understanding which is a kind of freedom that allows you to form your policies the way you desire. When you get a loan from institutions, they impose restrictions, therefore you have to weigh the cost and benefits of these two things. I would say that, it would be good for us to try to take advantage of this financing, to the extent we can, provided it doesn’t create excessive political constraints”.

A Bank of Cyprus source told the Cyprus Business Mail that the lender is “open” and “willing to discuss options that may be beneficial to the bank and the country”.

Clerides said that if Cyprus requests to tap the complete amount allocated by international lenders “is going to translate in an internal political cost, then there is no need”...


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