Conditional terms could be included in Cyprus bailout deal such as greater commitment of future gas revenues to secure the sustainability of the Cypriot debt, according to Deutsche Bank’s report on Cyprus debt crisis issued on 18 January.
Deutsche Bank , says, inter alia, in its report that “it is worth reminding ourselves that the crisis in Cyprus is first and foremost a banking crisis”, noting that “the recapitalisation needs of the banking sector, provisionally pencilled in at EUR 10bn (55% of GDP) have forced Cyprus to seek a bailout which could total over EUR 17bn (nearly 100% of GDP)”.
“With debt/GDP reaching 140% of GDP after bank bailout costs, questions have been raised over the sustainability of Cypriot debt”, it adds.
It also notes that “our debt sustainability analysis suggests that debt/GDP could fall back down to 122% of GDP by 2022 based on the growth projections and fiscal targets of the government. A comprehensive privatisation programme (EUR 3bn suggested by Ministry of Finance) could lower it further to 106%”.
However, it continues, “the projections above could prove optimistic. We demonstrate that a scenario leading to an unsustainable debt trajectory is very plausible. In this case direct bank recapitalization by the ESM could be a crucial component for achieving debt sustainability”.
In addition, it says that “the recapitalisation of the banks has to be accompanied with widespread reform of the banking sector”, adding that “one aspect that has caught the eye of the media, especially in Germany, is financial transparency”.
“We find that this attention has been misdirected, with an excessive focus on the phrase ‘money laundering’. Indeed when it comes to money laundering (concealment of illegal proceeds), Cyprus performed reasonably well in the latest evaluation by MONEYVAL in 2011, although implementation of antimony laundering could arguably be strengthened”, the report stresses.
It says moreover that “it is rather Cyprus’s status as an offshore tax haven with a relatively opaque banking sector heavily used by foreign depositors (non-resident deposits total EUR 24bn, with much of the money coming from Russia) that is under scrutiny”.
“We feel that firmer commitments on anti-money laundering implementation and improving financial transparency will likely be agreed, in addition to those already made, to appease the German concerns”, it says.
Deutsche Bank considers PSI on Cypriot debt as part of a bailout an unlikely scenario at this stage, adding that “the structure of public debt makes the potential benefit from PSI for debt reduction limited, at 11% of GDP by our estimates, and the risks of contagion are high”.
it also notes that “there are political obstacles on the creditor side, with differing stances between the Europeans and the IMF. Cyprus is also becoming a contentious issue for the German parliament”.
According to the Deutsche Bank’s report, “With the Cypriot presidential elections in February, getting a deal before then looks increasingly unlikely. Current opinion polls suggest a victory for the centre-right Nicos Anastasiades. If this occurs, a new government could finalise a deal with the Troika by the end of March”.
The report adds that “we feel that a solution involving firmer privatisation commitments will likely be agreed.Given the likely delicacy of assumptions this may need to be revised at a later date. For this, conditional terms could be included in the MoU”.
“For example, greater commitment of future gas revenues by Cyprus and direct recapitalisation by the ESM in the event of higher than expected debt/GDP”, Deutsche Bank concludes in its report.
