Cash-strapped euro zone minnow Cyprus said it would get a 2.5 bln euro loan from close ally Russia on Wednesday, skirting high yield-demanding traditional lenders with an interest rate less than half the going market rate.
The bilateral deal, due to come into effect in January 2012, will see Cyprus get 2.5 bln euros at an interest rate of 4.5%. The loan will be valid for 4.5 years, without a penalty if it is repaid sooner, government spokesman Stefanos Stefanou said.
Although a rare international borrower, Cyprus has seen yields on its bonds traded in secondary markets spike in recent months as markets take fright at the debt crisis that has hammered bigger neighbour Greece. Cyprus's foreign creditors are predominantly European.
"(This deal) opens yet another market for the financing of the Republic of Cyprus in addition to the traditional European market, and creates even more prospects for deeper economic cooperation between Cyprus and Russia," spokesman Stefanou said. There has been speculation that Cyprus will be genrous with Rusian bidders who will bid for the remaining 12 offshore blocks for gas exploration when the auctions resume early next year.
The island's cabinet on Wednesday authorised the Cypriot finance minister to go ahead with the deal, he said.
Cyprus has seen its borrowing costs spike both domestically and abroad in recent months because of exposure of its banks to Greece and fiscal slippage, fanning speculation it could be next in line for an EU bailout.
Cyprus's deal with Russia comes as Greece, shut out of international markets, struggles to push through round after round of deeply unpopular austerity measures demanded by its bailout lenders to bring down its debt.
Last week, Cyprus had to pay 4.60% for 245 million euros in 13-week domestic treasury bills.
Its 10-year benchmark bond , stuck with a yield over 11% on the secondary market for the past two months, was bid at 10.60% on Wednesday, according to Reuters data.
"The Cypriot government would like to thank the Russian federation, and for the confidence it has shown in Cyprus and its economy," Stefanou said.
Cyprus is a leading offshore centre for capital and finance, and ranks in official statistics as the largest source of foreign direct investment into Russia. Most of that investment capital is Russian in origin, financiers say.
The island has been a long-time Russian ally. Its incumbent President, Demetris Christofias, was educated in Soviet-era Moscow and is a fluent Russian speaker.
The island recently launched a drive to explore for natural gas in the eastern Mediterranean, next to an Israeli prospect which is thought to be the world's largest of the last decade.
The island, which is expected to have a public debt of 65% of gross domestic product by the end of 2011, has just over 1 bln euros in debt maturing early next year.
Stefanou said the loan would be used for short to medium term financing, and alleviate liquidity pressure on Cypriot banks, which have been the main source of borrowing for the state in the past 18 months. It was also expected to ease secondary market bond yields, he said.
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