How Cyprus re-entered the market

Agora Contributor: Fiona Mullen
en_GB Photo by Myrto Papadopoulos [www.myrtopapadopoulos.com]
Photo by Myrto Papadopoulos [www.myrtopapadopoulos.com]

If the speculation is correct, then Greece will tap the bond markets this week for the first time in three years and for the first time under the SYRIZA-led government.

Opinion seems to be split over whether this is a good idea, therefore it is worth walking through how Cyprus re-entered the market during its bailout programme to see if there are any parallels.

Cyprus lost access to the international bond markets in late 2010, when Standard & Poor’s (S&P) rating agency downgraded the sovereign because of concerns about the impact on banks of contagion from Greece.

This was the beginning of a slow-burn crisis that peaked in March 2013, when the Eurogroup of eurozone finance ministers decided on a partial bailout of 10 billion euros, complemented by an unprecedented “bail-in” (haircut) of uninsured bank depositors that amounted to some 9.4 billion.

Yet by June 2014, Cyprus was back in the market again, issuing a five-year European Medium Term Note (EMTN) at a yield of 4.85 percent that was 414 basis points above the benchmark. The bond was more than two and a half times over-subscribed.

No immediate need

Like Greece today, Cyprus did not have any immediate need to issue debt at that time. It was running both a cash and a primary surplus (balance excluding interest payments) and was still in a bailout programme, meaning that short-term debt redemptions were covered.

Both countries had also just received upgrades from a major rating agency. Moody’s Investor Service upgraded Greece on June 23 to Caa2 (positive outlook) from Caa3. Standard & Poor’s had upgraded Cyprus to B (positive outlook) from B- in April 2014.

The big difference between the two countries here is the ratings. When Cyprus issued its first bond it was rated four notches below investment grade by S&P. Today Greece is rated eight notches below by Moody’s.

Another difference is the debt ratios. In April 2014, the IMF had projected a debt/GDP ratio for Cyprus of 121.5 percent of GDP in 2014. (This ratio later dropped by around 10 percentage points because of a large upward revision to historical GDP.) The European Commission’s most recent Spring forecast for Greece expects the debt/GDP ratio to reach a whopping 178.8 percent this year.

This is one reason why Greece will probably pay higher than 414 basis points above the benchmark if it does issue a bond this week. Bloomberg data for yields on the Greek and German 10-year bonds on Friday suggest that Greece will be paying closer to 473 basis points over benchmark.

The final difference was the growth trajectory. Cyprus was still in recession in 2014, whereas Greece is expected to grow this year by 1.6 percent according to the latest Bank of Greece (central bank) forecast.

Reasons for scepticism

A key source of scepticism about Greece issuing a bond has come from Greece’s central bank governor, Yannis Stournaras, who said it was “a bit early” and called for “two or three emblematic privatisations” first.

He is probably worried that, if Greece is able to tap the markets again, then the left-wing government will drop all plans of privatisation.

This is indeed what happened in Cyprus. Under the bailout programme, Cyprus was supposed to raise 1.5 billion euros (around 9 percent of GDP) through the privatisation of the telecoms operator, Cyta, the Electricity Authority of Cyprus (EAC) and other smaller organisations. By the end of the programme, the state had sold only a concession for the Limassol port.

The government did make an effort to turn Cyta into a private company wholly owned by the state, but as a minority government, it was unable to pass even this first step through parliament.

Other plans to sell 400 million euros in gold reserves and reduce legacy debt with the Central Bank of Cyprus, by swapping 1 billion euros in debt stock for state land, were also quietly dropped during the course of the bailout programme, largely because the government was (like Greece today) over-achieving on its fiscal targets.

Managing maturities

That is not to say that Cyprus wasted its access to the market. It used the proceeds of its first international bond issue in June 2014 to cut in half the domestic "Laiki bond" - the bond that the previous government had issued to bail out Laiki.

It has followed the same pattern for all the debt issued since. Between June 2014 and June 2017 it issued 4.6 billion (around one-quarter of its entire debt stock). Each new debt issuance has been used to lengthen maturities or swap more expensive debt. This has significantly cut the debt redemption spike in 2019-20, which was the period when many analysts feared Cyprus would need to ask for a second bailout.

At the same time, the Cyprus government has kept a tight rein on spending. This will probably be the first year since 2011 in which government expenditure has risen. Even though Cyprus exited the bailout programme in March 2016, general pay rises in the public sector are still on hold in 2017-18.

The key question for Greece, therefore, could be what it does with its newfound access to the markets.

The recession in Greece has been much deeper, and afflicted far more people far more severely than in Cyprus. While the economists will be hoping that the government uses the proceeds to smooth out its debt maturity profile, the government is bound to be wondering how it can spend it to claw back some of the support that it has lost in the past few years of austerity.

*Fiona Mullen is Director of Sapienta Economics and author of the monthly Sapienta Country Analysis Cyprus.

1 Comment(s)

  • Posted by: Dean Plassaras

    Fiona:

    The situation in Greece is far more different than Cyprus. We now have strong evidence that none of the Greek politicians knew the underlying plot. The “muddle” arose because for reasons of political expediency, the europoliticians decided in May 2010 to hide their second rescue of the French and German banks by disguising it as “assistance for Greece”. Why? This was convenient for the banks, of course. But that was not the main reason. The main reason was that European politicians(X-Greeks) feared being punished by the electorate if they had to ask parliaments to endorse another round of direct assistance for the banks, which would have been necessary if the Greek debt had been immediately written down. So, instead, they asked for funds for Greece, which were then paid to the banks in various more or less direct ways. The result was that Greece ended up owing more and not less money and owing it not to banks but to governments and tax-payers. So all the Greek politicians, including Tsipras, have saddled us with more debt and now they want reforms to justify it, which in turns means another 45 years of misery for the Greek people. None of the Greek politicians ever understood the deliberate sacrifice of our own society in order to save other interests outside Greek borders. They instead told us (and many still believe this) that it was us who brought it upon ourselves. No, what we brought upon ourselves was 20% of the total; the rest of 80% is a non-Greek problem which we now own and will turn our living existence to hell.

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