* ECB to charge higher collateral haircut *
Cyprus said on Thursday that it would turn to the domestic market for refinancing while high external borrowing costs persisted, but said it was also looking at other options to plug its fiscal gaps.
Fitch downgraded Cyprus to BBB from A- on Wednesday, citing an increased likelihood the island would need a bailout because of now prohibitively high external borrowing costs, Cypriot banks exposure to Greece and fiscal slippage.
The other two main rating agencies, Standard & Poor's and Moody's, both cut the island's rating at the end of July. Moody's rates Cyprus Baa1, Standard and Poor's BBB+.
Authorities have repeatedly denied that the island would require aid, but Finance Minister Kikis Kazamias, with less than a week in office after a mediocre cabinet reshuffle, implied that going onto international markets, where yields on bonds have spiked, was not an option for the Republic at present.
"Taking into account the situation … yes, we will be looking at the domestic market," Kazamias told reporters.
However, he said, there were other financing options that the Republic was also looking at.
"It has been mentioned that some doors have shut. I can however tell you that there are some doors that we have not used until today," he said.
His predecessor, Charilaos Stavrakis, had embarked on several roadshows in order to attract investors from Russia, with recent auctions of small amounts of debt, in the region of 30 to 60 mln euros, successfully sold to Russians.
When asked how Cyprus would refinance 1.2 bln in bonds which is maturing in January and February, Kazamias answered: "As we always do."
It is not clear if the Bank of Cyprus, the island’s largest lender, will be willing to generously support future bond auctions, particularly as recent European stress tests suggested the island’s two main banks were in a fairly strong financial situation, but not considering buying government bonds or the cost of rebuilding the economy after a munitions blast destroyed the island’s main power station.
Cyprus has increasingly focused on its domestic market for borrowing this year as bond yields have spiked on international markets, where trading is very thin.
The island on Wednesday unveiled a two-year watered down austerity package worth 600-750 mln euros to tame a runaway deficit. It also needs to convince markets it was intent on long-overdue reforms which have cost it a spike in borrowing costs and mounting speculation it could be the fourth euro zone member requiring a bailout.
ECB TO CHARGE HIGHER
Meanwhile, Cyprus government bonds used as collateral in the European Central Bank's refinancing operations will be given an extra 5% discount after rating agency Fitch downgraded the country's rating, according to the ECB's rules.
Fitch cut Cyprus' credit rating by two notches to BBB on Wednesday due to fiscal slippages, saying the island state was likely to require a bailout to meet its funding needs.
The ECB accepts government bonds as collateral at market value minus a haircut, or discount, of between 0.5 and 8.5% depending on outstanding maturity, as long as at least one credit rating agency rates the country at A- or better.
When the best rating is lower than that — as is the case with Cyprus now — the ECB charges an additional haircut of five percent.
Greek and Portuguese government bonds are also subject to the same discount, but Ireland escapes this as a fourth agency used by the ECB, DBRS, rates it A.
