The European Central Bank said Cyprus’s government bonds are temporarily ineligible as collateral after the Mediterranean island nation’s credit rating was cut by Fitch Ratings and Standard & Poor’s.
The Governing Council “has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Republic of Cyprus for use as collateral in Eurosystem monetary policy operations,” the Frankfurt-based ECB said late yesterday in a statement.
Cyprus’s local-currency issuer rating was lowered to restricted default from CCC by Fitch Ratings yesterday after the nation completed an exchange of government bonds for longer-dated securities. Standard & Poor’s cut Cyprus’s sovereign credit ratings to selective default.
The ECB said its decision no longer to accept Cyprus’s government bonds as collateral “takes into account the changes in the credit rating of the Republic of Cyprus as a result of the transactions announced by the Ministry of Finance of the Republic of Cyprus.”
The central bank said it will reassess the potential eligibility of Cypriot marketable debt instruments upon the conclusion of the bond exchange.
The settlement date for the exchanged bonds is July 1 and Fitch said yesterday it will raise the country to a rating that’s “likely to be low speculative grade” shortly thereafter. Standard & Poor’s said the ratings could be raised again as early as next week to CCC+.
The bond exchange is part of commitments under a 10 billion-euro ($13 billion) bailout that saved Cyprus’s financial sector from collapse in March, the Finance Ministry said. Under the rescue program, deposits above 100,000 euros are taxed after an initial plan with a levy on deposits of less than 100,000 euros was rejected by the country’s parliament.
As long as the ECB doesn’t accept government bonds as collateral, banks using such bonds to obtain funding will have to tap their national central banks’ Emergency Liquidity Assistance programs.
“Liquidity needs may be addressed by the relevant national central banks in line with existing Eurosystem arrangements,” the ECB said in the statement. “We welcome Cyprus’ efforts to return to growth and prosperity within the framework of the program.”
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