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PIMCO sees Cyprus banks recap at 5.98 - 8.87 bln euros

15 February, 2013

 * Better than government led us believe? *

Cyprus banks will not need as much for their recapitalisation as the outgoing government had led us to believe, but would still require anything between 6 to nearly 9 bln euros, according to PIMCO’s final report.
The diagnostic test for the capital needs of all financial institutions found that in the baseline scenario, the island’s three main commercial and Cooperative banks would need 5.98 bln euros, of which 5.616 bln would be primarily for Laiki Bank and Bank of Cyprus, as well as Hellenic Bank to a much smaller extent, and some 364 mln for the Cooperative banks, based on the valuation conducted on 65% of all Coops.
In the worst-case scenario, Laiki and Bank of Cyprus, the pair most heavily exposed to Greek government bonds and private sector debt, as well as Hellenic, would need 8.128 bln euros, of which only 300 mln for the smaller of the three. A further 589 mln euros has been foreseen for the Coops, down from the initial estimates of 1.6 bln. In this scenario, the foreign-owned banks would also require about 149 mln euros, mainly EFG Eurobank, as Alpha Bank would secure recap funds from its mother company in Greece.
Thus, the worst-case scenario adds up to 8.867 bln euros, to which some 7.5 bln will be added to include the public sector shortfall as well as the bailout assistance to help the government roll over its maturing debt.
According to the PIMCO report, the projections over a three-year period see losses of about 14 bln to 18.5 bln euros, with the lending rate based on Euribor rising by 1.2% to 2.45%, while property prices are expected to retreat within a range of 12.5% to 25.5%.
The conclusions of the report was supposed to have been made public when the Memorandum of Understanding was signed between the Republic of Cyprus and the international creditors. However, the summary has been leaked, paving the way for the MoU to be signed soon after the presidential elections on February 17/24 and the inauguration of the new president on March 1.
“Pimco’s initial estimate for bank recapitalisation needs was put at EUR 10 bln but this spooked the IMF, which worried that this would push the debt level to unsustainable levels,” explained Fiona Mullen, Director of Sapienta Economics.
Cyprus applied for a bailout at the end of June 2012 and came to an in principle agreement with its creditors (the troika) in mid-November. Parliament then passed a raft of austerity measures and other laws demanded by the troika almost unanimously in December.