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Cyprus, Troika Agree Bailout Terms, ECB Demetriades Says

November 30, 2012

Cyprus, Troika Agree on Bailout Terms

Cyprus in June became the fourth euro-area nation to request a financial rescue since Greece’s 2010 bailout after Cypriot lenders including Bank of Cyprus Plc and Cyprus Popula Bank pcl were weakened by their exposure to the Greek economy. Photographer: Chris Ratcliffe/Bloomberg

Cyprus and international lenders have agreed on the terms of a bailout the eastern Mediterranean country needs to refinance its banks and pay bills, European Central Bank governing council member Panicos Demetriades said.

“The memorandum has been agreed and the only thing missing is the exact amount which will be discussed at a eurogroup meeting,” Demetriades told reporters in Nicosia today. “The main thing is that there is an agreement.”

Cyprus in June became the fourth euro-area nation to request a financial rescue since Greece’s 2010 bailout after Cypriot lenders including Bank of Cyprus Plc and Cyprus Popular Bank pcl were weakened by their exposure to the Greek economy. Cypriot banks lost more than 4 billion euros ($5.2 billion) in Greece’s debt restructuring.

The exact amount needed to recapitalize Cypriot banks, which will determine the total bailout amount, hasn’t been established yet while the so-called troika of the International Monetary Fund, the European Central Bank and the European Commission estimates the lenders may need 10 billion euros, Demetriades said. The deal with creditors ensures the viability of Cypriot debt, he said.

Workers Protest

About 150 contract workers protested at the country’s finance ministry and then Parliament yesterday after last week’s announcement of the 2013 budget, which includes a 5.3 percent spending cut from wages, pensions and bonuses in the public sector as well as staff reductions and salary freezes.

The outlook for the Cypriot banking system remains negative, reflecting in part the likelihood of severe capital shortfalls, Moody’s Investors Services said yesterday. Moody’s said it estimates that the cost of recapitalizing Cyprus’s three-largest banks to a 10 percent core Tier 1 ratio, which is a measure of financial strength, will be more than 8 billion euros.

Cyprus is awaiting the results of an interim report from Pacific Investment Management Co. that will determine the capital needs of each lender. The final report will be published in late January, Finance Minister Vassos Shiarly said Nov. 22. The interim figures will be published on Dec. 7.

Bailout Amount

The Cyprus loan deal will be discussed at a Dec. 3 meeting of euro-area finance ministers, an EU official today told reporters in Brussels on condition of anonymity. The ministers are currently studying a draft memorandum of understanding. The exact amount of the bailout can’t be determined until after the Pimco report is completed, the official said.

The country may need as much as 17.5 billion euros in aid, almost the size of its economy, based on the 10 billion euros- figure for the banks, 6 billion euros to refinance state debt from 2013 to 2016 and 1.5 billion euros to cover fiscal deficits, Shiarly also said Nov. 22. Cyprus is aiming for a rate of 2.5 percent on its troika loans, Stockwatch yesterday reported Shiarly as saying.

An agreement with international creditors will require a fiscal adjustment of about 7.3 percent of gross domestic product between 2012 and 2016, Cyprus’s Finance Ministry said yesterday. The country aims at a primary surplus of 4 percent of its economy by 2016, it said.

The economy will shrink 2.4 percent this year and 3.5 percent next year, according to the 2013 budget, released on Nov. 22. The Cypriot economy was estimated to be worth almost 18 billion euros in 2011, according to the Nicosia-based Cyprus Statistical Service. Demetriades is also governor of the Central Bank of Cyprus.

To contact the reporters on this story: Paul Tugwell in Athens at ptugwell1@bloomberg.net; Eleni Chrepa in Athens at echrepa@bloomberg.net

To contact the editor responsible for this story: Jerrold Colten at jcolten@bloomberg.net


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