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The Cyprus government took advantage of a thirst for high risk in the international bond markets by successfully issuing its first ever 30-year paper this week, allowing it to pay off early the final instalment of a bailout loan secured from Russia at the height of the financial meltdown seven years ago.
Although the Russian loan initially carried a higher rate of 4.5%, it was renegotiated down to 2.5%, making it cheaper than this week’s bond issue, prompting critics to argue that the double bond of EUR 750 mln maturing in 30 years and a further five-year 500 mln issue was not necessary.
Justifying the issue, Finance Minister Harris Georgiades said that the conditions prevailing in international markets allowed it and that there was an opportunity to do so, boosting the island’s reputation based on three years of successive growth, reducing public sector debt and restructuring the banking sector, which will no longer be a burden on the state and the taxpayer.
Georgiades explained that the Russian loan included a clause for earlier repayment, at a time when Cyprus also paid off its obligations to the Troika of international lenders that provided a EUR 7.5 bln bailout, a quarter short of the initially envisaged rescue amount.
This helped ratings agencies Standard and Poor’s, as well as Fitch, upgrading Cyprus back to investment grade, with cautious Moody’s still one notch below.
With the Finance Minister arguing that his economic policies were vindicated, it is true that Cyprus is now borrowing with a far smaller spread from others in the eurozone, allowing it to return to the market soon for more liquidity.
On the one hand, the gamble is probably that all of the present-day problems will be resolved by the time the 30-year bond matures, primarily the deadlock in reaching a Cyprus solution and reunification, itself hampering the launch of oil and gas exploration and extraction, and the subsequent EastMed pipeline that will never happen unless Turkey allows it.
On the other hand, Harris, who will have retired by the time the bond matures, has probably been assured that the slow-pace of reforms in all sectors of the economy will eventually work themselves out by then, non-performing loans will have been settled and he will get a pension after all, despite fears that the Social Insurance Fund will remain unhealthy due to an ageing population and sluggish contributions.
The trouble is, with Harris freely advertising the fact that the economy is on a healthy path of recovery, and with the potential that natural gas revenues will eventually make their way into state coffers, the Finance Minister, who steps down later this year, has given fodder to civil servant demands for pay hikes, returning the island to deteriorating public finances that caused the economic crisis in the first place.
A swan song may be, but perhaps nothing to celebrate about.
