Fitch says Cyprus President’s Bailout Mandate may Ease Negotiations

The stance of the new Cypriot president-elect and his government could make the country’s negotiations with the Troika for a rescue package less challenging than under the outgoing president, according to Fitch Ratings.

The credit ratings agency (CRA) said that Nicos Anastasiades has stated his intention to secure “timely financial support,” and now arguably has a mandate to conclude negotiations. He has already been building relations with leaders of key European partners, including Germany.

However, despite his overwhelming victory in the weekend’s elections he will face the same policy challenges as his predecessor, and there is still lingering uncertainty about the timing and details of an EU rescue programme.

Fitch downgraded Cyprus to B/negative in January, as the CRA believed that bank recapitalisation costs are likely to be higher than previously thought. But the rating is supported by its expectation that the authorities will reach agreement with the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) – aka the Troika – on an official financing programme in time to pay a €1.4bn bond redemption on 3 June. The final details will depend on the Troika and the government’s assessment of debt sustainability, which has not yet been finalised.

Fitch said that the bailout programme is unlikely to include restructuring of Cypriot sovereign debt, because it would not provide significant debt relief. It would also weaken the credibility of eurozone policy makers, who have said that Greece’s private sector involvement (PSI) was an exception, and could create contagion risks for other eurozone countries. That some of the debt held by foreign investors is covered by international law could also add to the costs and uncertainty of PSI.

Fitch expects the Cypriot government to privatise some state-owned enterprises as part of a final agreement with the Troika, but there is uncertainty about how much debt relief this would achieve. It anticipates that any restructuring of bank debt will be restricted to junior debt holders, though banks are mostly deposit financed, which limits the potential impact. The CRA also thinks there is a possibility of mutualisation of bank recapitalisation costs with eurozone partners, for example through the European Stability Mechanism (ESM), although this is not its base case.

The previous government had requested official help from their European partners and the IMF in June 2012, although a Memorandum of Understanding (MoU) has yet to be signed. The government has been shut out from debt markets for almost two years.

A bilateral €2.5bn loan from Russia at the end of 2011 helped with most of the public financing requirements last year. The Russian government has signalled that it will extend the maturity of the loan which was due in 2016. According to reports Anastasiades has stated that reaching agreement with Russia on contributing to a rescue will be an “immediate priority”, though it is unclear whether any such deal can be struck.

More recently the authorities have become dependent on issues of Treasury bills to state-owned enterprises (SOEs) and banks and available cash reserves. Fitch concludes that a disorderly default stemming from the government running out of cash before the June bond payment is highly unlikely.

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