* Stavrakis eyes Russia for future financing *
The government is turning to the domestic market for a 700 mln euro bond auction Wednesday, preferring liquid conditions at home for now rather than international markets where yields are at record highs on Greek spillover jitters.
Domestic borrowers are being offered a 4.5% coupon, compared to a 2% coupon the sovereign offered in a similar bond issue in January 2010.
"The size is noteworthy," said Michalis Florentiades, head of economic research at Hellenic Bank, adding that the auction would provide an indication whether Cyprus could meet its financing needs domestically.
"If you watch the way the yield is going, the international market looks unfriendly right now," he said.
A euro-denominated Cypriot 10-year government bond issued to international investors in February 2010 was bid at 8.07% on Tuesday, up from around 6.20% in mid-May and 4.20% in the middle of last year.
Cyprus has been downgraded by all three ratings agencies because of its banking system's exposure to Greece, and delays in tackling structural reforms.
Analysts say the republic will need a further 1.4 bln euros in financing over the next 12 months. Traditionally, most of Cyprus's debt is held by local lenders, but it had been turning increasingly to international markets in the past two years.
"This issue pretty much proves that they did not have a choice but go to the local borrowers because things are difficult on international markets," said economist Fiona Mullen.
BAD TIMING?
The timing raised eyebrows, as Greece's parliament was due to vote this week on an austerity package designed to bring it back from the brink of default.
"It suggests they want to borrow as much as possible now in case the situation gets worse even for the domestic market," Mullen said.
Authorities intend to issue domestic debt in the next six months which will maintain a balance of 75% held by domestic lenders and 25% foreign investors, the Finance Ministry said on June 11.
Latest Central Bank data puts total deposits in the local banking system at 70.8 bln euros on loans of 63.2 bln. "There appears to be liquidity in the banking system," Florentiades said.
Official sources said Wednesday's issue was not designed to replace tentative plans by the republic to tap the Eurobond market in a Euro Medium Term Note (EMTN) issue this year.
However, the finance ministry is likely to go cautiously on international markets as pressure piles on euro zone periphery debt while the Greek debt crisis continues.
Authorities said in May they would increase the maximum amount it can borrow under its current EMTN programme to 9 bln euros from 6 bln. At present, the finance ministry has utilised about 4.77 bln euros under the EMTN programme.
Nevertheless, other financing options are gaining traction.
The Finance Ministry earlier this year said it was looking at private placement options, including a Schuldscheine, a type of debt instrument normally placed privately in the German market.
Finance Minister Charilaos Stavrakis said last week that another option was looking at raising financing from the Russian market, and speculation is rife that authorities plan road shows in Russia next month.
