Cyprus banks await decree on 3-yr bonds

Cyprus banks are eagerly waiting for the Finance Minister’s official go-ahead for the implementation of the draft law that will pave the way for the issue of the EUR 3.0 bln three-year government bonds to be announced on November 20.
The Coops are reported to be eligible for EUR 435 mln, based on their share of the local mortgage loan market, while all other banks with capital adequacy ratio exceeding 8% and that meet a number of other criteria will be eligible to take part in the remaining issue of EUR 2.54 bln.
The actual amount will depend on the market share of the banks in the local mortgage and business loans.
The banks and the Coops will then collateralise the loans with the European Central Bank in order to secure loans at the 1% refinancing rate. This is seen as the last chance for Cyprus banks and Coops to tap into the cheap funding provided by the ECB, since according to ECB President Jean-Claude Trichet, the auction for cheap funding to be held on December 17 will be the last in its present form and will be gradually withdrawn.
Through the introduction of the 3-year special bonds, the government aims to provide cheap liquidity into the local banking system offering both individuals and corporations the opportunity to use cheap money in an attempt to reignite consumer demand and investment activity amongst local corporations.
This would boost banking volumes and also benefit the banks’ net interest margin despite the cheaper nature of the facility as it is expected that further normalisation of deposit spreads might compensate for the cheaper lending.
It is estimated that the total cost of the bonds for the participating banks and Coops will amount to about 1.90%, which is the 1% ECB loan rate plus the 0.9% fee applied by the government for adding its guarantee to the bonds and some minor charges.
The Finance Ministry hopes that banks will keep to their pledge to offer the loans at rates starting from 3.25% for the lowest risk loans and up to 4.5% for the higher risk loans.