Cyprus 2-year borrowing costs surge at auction

 * Paying the price for the ratings downgrades *
Cyprus sold 714.57 mln euros in two-year debt on Wednesday, paying domestic lenders 293 basis points more than a sale of bonds of similar maturity 18 months ago as financing costs surge in the euro zone periphery.
Wednesday's auction for up to 700 mln euros to refinance debt was oversubscribed, fetching bids of 714.568 mln which were accepted, the finance ministry's debt management office said.
The average yield for the paper, which offered a 4.50% coupon, was 5%, compared to an average of 2.07% in January 2010 which then offered a 2.0% coupon.
Cyprus, which was never a heavy international borrower, is seen nonetheless turning increasingly to domestic markets to meet its borrowing requirements as yields on its international bonds spike in secondary markets.
"There is a clear attempt to tap the local market as much as possible," said economist Symeon Matsis. "The higher yield is Cyprus paying the price for the ratings downgrades by international agencies."
A euro-denominated Cypriot 10-year government bond issued to international investors in February 2010 was bid at a yield of 8.2% on Wednesday, up from around 6.20% in mid-May and 4.20% in the middle of last year.
But analysts say Cyprus cannot expect to bankroll its debt from the local market indefinitely.
"It can continue to tap domestic markets in 2011, but it may be more difficult in 2012," said economist Stelios Platis. "By that time we hope that the Greek crisis will have blown over."
The island has been downgraded by all three credit rating agencies on its banking sector's exposure to Greece, and delays in tackling structural reforms.