S&P sees Cyprus bailout at 15 bln euros, 6.6 bln for gov’t

Standard and Poor’s estimates that any bailout for cash-strapped Cyprus would likely be “upwards” of 15 bln euros, according to a note from the Investment Bank of Greece, part of the Popular bank Group.
Cyprus formally applied for financial support from its EU partners last month, becoming the fifth member in the eurozone to do so because of a runaway budget deficit and its banks’ vast exposure to Greek sovereign debt.
Over the past two years, the rating agency has downgraded the Republic of Cyprus (BB+/Negative/B) a total of six notches, citing potential write-downs arising from the banks' exposures to the Greek public and private sectors, as well as delays in the consolidation of public finances.
Faced with the need to recapitalise the largest two lenders – Bank of Cyprus and Popular Bank – to the tune of 2.3 bln euros, and a testing government debt maturity profile, Cyprus is now negotiating a support package with the “troika” of the EU, European Central Bank and the IMF, to address its financial obligations.
S&P estimate Cyprus' total financial requirements over a three-year period at about 11 bln euros, or 61% of GDP. However, considering the uncertainty in Greece, and buffers applied in other programmes, such as Ireland and Portugal, S&P believes the total size of a program would likely be upwards of 15 bln.
To arrive at that estimate, S&P assessed the total cost of bank recapitalisation at 2.3 bln to meet the European Banking Authority (EBA) requirements. Moreover, S&P stated that if we add that to its base-case estimate for additional potential credit losses in 2012 and 2013 of 2.18 bln euros, it comes up with 4.48 bln or 25% of GDP. To that, S&P added 6.59 bln of additional financing needs in 2012-2014, which includes its estimates of the underlying budget deficit plus the amount of government debt maturing.
Finally, the rating agency calculated the annual budget impact of the above financial assistance and noted that it is of similar size to its annual output (i.e. in line with its treatment for other sovereigns, it includes recapitalisation funds as an increase in the government's debt stock and a corresponding increase in government expenditure).
S&P further noted that deep-rooted structural changes to the economy are necessary if future prosperity is to be assured. To this end, the rating agency expects that an agreement with the “troika” will act as a strong anchor.
Likewise, the prospects of future commercial gas extraction off the southern coast could provide a needed boost to investment and overall growth as well as to current account receipts in the coming years.
With bilateral lending unclear and the prospects of “troika” disbursements a few months away, pressure on short-term financing will likely increase. S&P also stated that it expects that the government will have to give in on a number of politically sensitive measures to secure a package of sufficient size, increasing the focus on presidential elections early next year.
S&P also noted that protecting an advantageous tax environment of 10% on corporates may prove more difficult than foreseen. Ultimately, S&P views that securing a bailout package is only one of the challenges currently facing Cyprus.