'Ready and willing to bailout the banks'.

Author:

Elias Hazou

THE GOVERNMENT is ready and willing to bail out the island's banks should the latter turn to it for assistance, Finance Minister Vasos Shiarly said yesterday.

The state may have to pump up some e1/41.5 billion into Popular Bank to cover losses on a Greek write-down if the bank's own recapitalisation attempts should fail.

If it cannot, the bank will be forced to ask for a government bailout. But the state itself is cash-starved. Cyprus could thus be forced into a bailout mechanism for the requisite cash, something which a leaked finance ministry memo last week alluded to.

Cyprus has been shut out of international capital markets for a year, and a bank bailout option could put considerable strain on restricted sources of state funding. The government acquired a e1/42.5 billion loan from Russia last year, just enough to cover its ordinary needs for 2012.

Barring a similar bilateral deal with a foreign lender, it would need to apply to the European Financial Stability Facility (EFSF) for a loan.

Quizzed by journalists yesterday, the Finance Minister explained that only states may apply to the EFSF and not the banks themselves.

Asked whether Cyprus should take the initiative and apply now to the support mechanism on its own terms, as some commentators have been suggesting, Shiarly said simply that the EFSF "is one of several and various ways which can be used for the recapitalisation of the banks."

He declined to name those other ways. It's understood, however, that he was alluding to bilateral deals with foreign lenders.

Commercial banks need to raise their capital by the end of June, due to new requirements on maintaining their total capital adequacy ratio (the ratio of a bank's capital to its risk) to nine per cent.

Asked whether the government would wait until that deadline or would move faster, Shiarly again kept his cards close to his chest:

"If the banks come to us and tell us they cannot meet their objectives, then we [the government] are ready at any moment to step up."

He was quick to add, however, that the decision rests with the management of the commercial banks.

Sunday's inconclusive poll in Greece has called into question that country's ability to impose the measures needed to guarantee its future in the euro. Asked about the current political limbo in Greece, and the likelihood of a Greek default, Shiarly said one should not jump the gun on the possible risks for Cyprus, whose banks are heavily exposed to Greek debt.

Noting that the situation in Greece "is certainly a cause for concern, not only for Cyprus but also for the rest of Europe," he also played down media speculation that the island might go down Greece's path.

Asked by a reporter whether Cyprus would return to the pound if Greece adopts the drachma, Shiarly offered:

"No. We belong to the eurozone, Cyprus has its own particularities and we shall handle them accordingly."

Takis Taoushanis, former CEO at cdb bank, told the Mail that a bailout of Cypriot banks would become inevitable should Greece default on its loans.

But such a scenario was improbable, he added. "Within Greece itself, there are very few voices who are actually calling for an outright default. Rather, they're talking about renegotiating the terms of the loan, playing to the popular reaction to the austerity measures.

"Also, it's no simple matter for a country to leave the euro. It doesn't happen overnight. And even if it does, there will be certain terms and conditions on Greece. In short, I don't think Greek politicians can simply declare 'we don't owe you anything' to the rest of the world. If they did, how would the country, hungry for hard cash, ever secure loans again after ditching the euro?"

Hypothetically speaking, were Greece to abandon the euro and re-introduce the drachma, the effects felt here would go beyond the devaluation of Cypriot banks' loans abroad, said Bernard Musyck, an associate professor of economics at Frederick University and a former country analyst with Moody's.

"Cypriot businesses that have invested in Greece would see their repatriated profits cut down to about a third or a quarter of their value, since they would now be denominated in drachmas.

Meanwhile Cypriot banks, which have already lost 75 per cent of their assets due to the Greek haircut, would see the value of the remaining 25 per cent divided by four. It won't be pretty," said Musyck.

The economist predicted that, whether or not Greece leaves the euro, the cash-strapped government here would eventually need to apply for assistance with a support mechanism.

"Alternatively, we could balance the budget, and cut the salaries and bonuses of the civil service, which is way too big for the size of the country. But this is a populist government, afraid to take painful decisions that might cost votes."

Musyck said that rating agencies would likely view the Greek political situation as putting Cypriot banks at increased risk, but did not want to speculate on what rating agencies would do with regard to Cyprus

Fitch is the only remaining ratings agency which has not cut Cyprus to the 'junk' category.

Finance Minister Vassos Shiarly

Copyright Cyprus Mail 2012

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