Cyprus has paid off early an International Monetary Fund loan that was part of a €10 bln rescue package in 2013 from lenders to save the island’s banking system, with analysts praising the government for a fiscally sound bond issue.
Finance Minister Constantinos Petrides said the loan’s early repayment would bolster the country’s credibility in the eyes of investors and improve its ability to raise money directly from international markets.
“Our target is to secure our country’s stability and growth perspective,” Petrides said in a statement.
Cyprus was able to repay the loan via a low-interest double bond issue that yielded €1.75 bln.
It secured €1 bln from a 10-year bond issued at a 0.73% rate. A 20-year bond raised €750 mln at 1.33%.
Total pledge value exceeded €13 bln, comprising the largest bid in of this type in Cyprus’ history, and the bonds were oversubscribed seven times, Petrides said.
“This demonstrates the depth of trust that international markets show toward Cyprus’ economy.”
He said the bond issues cover most of Cyprus’ financing needs for 2020 and will save the country €15 mln in interest payments on the IMF loan.
“This proves that Cyprus can cover its own financing needs from the markets.”
Analysts believe the move is a fiscally sound one as the government acted fast to take advantage of low-interest rates internationally.
They said the government turning to international markets, essentially to roll over a debt, was the right thing to do as threats to the economy may come back to haunt Cyprus.
In comments to the Financial Mirror, President of the Fiscal Council Demetris Georgiades said that Cyprus was quick to take advantage of record low-interest rates and to rollover older debt with higher interest.
“It was a fiscally sound move, as this way we guarantee that part of our debt will carry a lower interest rate for the coming years.
No one knows what is on the cards, what events may unravel, on a local and global scale, affecting interest rates,” said Georgiades.
He noted that Cyprus is essentially able to obtain long-term loans, is an indication of trust from the international market.
“This trust, however, is fragile as we are still not in the clear regarding the banking system’s exposure to NPLs, the supreme court is still considering a lawsuit against the state brought before it by a group of civil servants demanding that they are compensated over illegal, as they claim, pay cuts enforced during the crisis years.”
Banks also have cash
Georgiades said he would have liked to see the government turning to local banks for lending, as there is excess liquidity which banks appear to be unable to put back into the market.
This inability has led them to take decisions like applying negative interest rates on large deposits.
Director, Sapienta Economics, Fiona Mullen, said the government’s decision to turn to the international markets so soon after the last visit in April 2019, shows Cyprus needs to maintain its presence in the market.
“The government jumped in to take advantage of low-interest rates while also playing it safe as it cannot be sure of what the future holds.”
“While we are not out of the woods regarding NPLs, there is still the matter of the lawsuit brought against the government by civil servants which may see the state having to dish out a €1 bln in back payments.”
Cyprus University finance professor, Sofronis Clerides, said the government could use primary surpluses to cover that amount, but having to pay out such a large amount would certainly have its impact on Cyprus’ credit rating, making borrowing a difficult task in the future.
He said Cyprus is still paying higher interest than most EU member states, as the country is at the lower end of the list when it comes to its credit rating.
“Cyprus’ sovereign debt is the fifth highest in the eurozone. Cyprus’ debt and, by extension, the cost of borrowing, is also affected by the amount of non-performing loans accumulated by private banks, which is the second-highest in the euro area,” argued Clerides.
On the opposite side of the fence, Anna Theologou, economist and Independent MP has a different take on the matter.
She told the Financial Mirror it is not a sound fiscal move to issue bonds with a much longer maturity than the ones you are planning to rollover.
“With the policy of issuing 20 and 30-year bonds, the government is rolling over its debt for future generations to pay.”
Theologou argued that the government could have issued another 6-year bond.
She said Nicosia turned to international markets last April asking for €1.25 bln to rollover a Russian loan, attracting bids worth €4.8 bln for a five-year bond with an interest rate of 0.625%.
“However, we issued a five-year bond for only €500 mln with an interest rate of 0.625% and we issued a 30-year bond for the rest €750 mln with an interest rate of 2.75%.”
Theologou said the government should have issued bonds with a shorter maturity date for all the funds needed.
She argued that a fiscally sound policy would be one that aims to pay off the debt rather than leaving future generations to deal with it.
“There is no vision or roadmap for repaying the debt,” said Theologou. “Currently, the state only directly benefits by €150,000 for every passport issued through the Citizenship for Investment scheme.
If it cared about lowering the debt, they could have demanded the state benefits more from investors. I would say they could even demand a million from each investor. Debt problem solved,” said Theologou.