Cyprus seeking help from Russia and China

Alan Lawton
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11

CYPRUS is looking to Europe, Russia and China seeking for the best terms for a €4 billion bailout package.

Deputy Europe Minister Andreas Mavroyiannis said that Cyprus needs €1.8 billion to recapitalise the Popular Bank within the next few weeks and that other banks may also need money. The Island could seek up to €4 billion in financial aid if it turned to the European Union for help.

During a visit to Ireland he said that no decision had been taken about how to bail out the Island’s banking system. But he said Cyprus could get help from Russia, China or both, and that their aid could even be mixed with European funds.

“Everything is on the table,” he said. “It can be a combination (of bilateral and European money). Whatever it is it will have a part of European – money or conditionality. I don’t know if it will be Russia or China,” he said.

Cyprus has been shut out of capital markets for more than a year, with many of its banks overexposed to the Greek debt crisis. It must find the equivalent of 10% of its gross domestic product by the end of this month to recapitalise Cyprus Popular Bank if no private investor is secured.

Mr Mavroyiannis said that borrowing money from the European Union (EU) carried baggage with it that bilateral loans did not.

“The problem with going through the (European bail-out) mechanism is that it received a very negative connotation because of what happened in Greece,” he said.

“Politically, when you say you are going into a mechanism people consider that there is something that is very negative. Politically, the government tries to avoid having to bear this negative effect.”

Nonetheless he said that Cyprus would stick to its EU obligations. “The money can come from outside, but you need to operate within the framework of the union,” he said.

Mr Mavroyiannis said that were Cyprus to tap the EU bail-out fund, it might ask, as a safety buffer, for more than the €1.8 billion it needs. “We are talking about €3 billion or €4 billion.”

Development of Larnaca airport hits problems

Stefanos Evripidou
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2

THE PROPOSED €600m Chinese investment at the old Larnaca airport appears to have hit a number of economic and legal snags which will be discussed today at a key meeting between representatives of the state, the company and Hermes Airports.

Communications Minister Efthymios Flourentzos has acknowledged that the proposal from Chinese-interest company Far Eastern Phoenix (FEP) to extend its original 19-year agreement with Hermes Airports for a further 31 years with the state is causing a few problems.

“Initially, the procedure was somewhat different because at first, the government’s approval was sought for a 19-year deal between Hermes and the company. The approval was not given because in the meantime, after letters were exchanged about the Chinese company, their interest in a 50-year contract was made known,” he said.

This changed the landscape entirely, he noted, which is why the government set up an ad hoc committee within the ministry and a ministerial committee to examine the proposal.

FEP proposes to transform the old airport into a commercial centre with a showroom and bonded facilities for Chinese factories to display products.

The Chinese investors want to extend a preliminary agreement with Hermes to hire the space for 19 years, after which Hermes’ concession agreement expires, for a further 30 years with the state before committing to the large investment.

[youtube=http://www.youtube.com/watch?v=0LMAxhNmVPk&rel=0&w=470&showinfo=0]

A meeting between a company representative, Hermes and the Attorney-general Petros Clerides will take place today to further clarify economic and legal aspects of the proposed project, which is expected to create new jobs and bring much-needed investment to the country.

Flourentzos said the focus now was on examining the economic advantages of the proposal, which if substantial would provide the necessary stimulus to overcome any legal obstacles.

“If we judge that the economic aspect is beneficial, we will see what legal procedures need to be followed to have a legally-sound process,” he said.

The minister said the government needed further clarification on the status and number of workers who will be brought to Cyprus (most likely from China), the size of the final investment and how it will be invested.

According to yesterday’s Phileleftheros, the relevant authorities charged with examining the proposal have identified a number of obstacles to its fruition, questioning the legality of the procedure followed by Hermes, and of the state extending the preliminary contract with the company.

Other problems reportedly raised include the commercial viability of the project, the financial viability of the company and migration and employment issues regarding the huge number of foreign workers that may be brought to Cyprus.

Two Cypriot banks downgraded by Moody’s

Alan Lawton
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0

YESTERDAY, Moody’s Investors Service took actions on three Cypriot banks to reflect the increased risk of a Greek exit from the euro area. Moody’s says that the banks’ extensive operations in Greece render their capital positions vulnerable to such an event.

Moody’s has taken the following rating actions:

  • Bank of Cyprus (BoC): The deposit and senior unsecured debt ratings were downgraded by one notch to B2 from B1, and the standalone credit assessment lowered to b3 from b2 (within the E+ bank financial strength rating). The bank’s ratings were placed on review for downgrade.
  • Hellenic Bank Ltd (Hellenic): The deposit ratings were downgraded by one notch to B1 from Ba3 and the standalone credit assessment lowered to b2 from b1 (within the E+ BFSR range). The bank’s ratings were placed on review for downgrade.
  • Cyprus Popular Bank (CPB): The bank’s B3 senior unsecured debt and deposit ratings were placed on review for downgrade. Moody’s will also re-assess the bank’s standalone credit assessment of caa1 (mapped from its E BFSR) during the review period.

Ratings Rationale

Yesterday’s actions on the Cypriot banks primarily reflect Moody’s view, as expressed on 1 June 2012, of the increased risk of Greece exiting the euro area.

Although a Greek exit is not Moody’s central scenario, the rating agency says that it considers the risk of a euro exit by Greece as substantial and recognises that the probability of such an outcome may increase further following the Greek parliamentary elections on 17 June.

The rated Cypriot banks maintain extensive branch operations in Greece, with exposures to Greek borrowers amounting to 42% of net loans for CPB, to 34% of gross loans for BoC, and 17% of gross loans for Hellenic. As such, their capital positions remain susceptible to the direct and indirect consequences of a Greek exit.

The heightened risk of a euro exit could lead to an acceleration in deposit outflows from Cypriot banks’ Greek branches, pressuring liquidity, whilst a euro area exit – triggering currency redenomination, a likely sovereign default and widespread economic stresses – would materially weaken the banks’ solvency.

Yesterday’s downgrades incorporate the impact of the increased risk of a Greek exit in the Cypriot banks’ ratings and reflect, on a relative basis, BoC’s sizable and Hellenic’s moderate exposures to the Greek operating environment. CPB’s ratings incorporate the severe solvency and liquidity risks that the bank faces.

Further reading

Press release: Moody’s downgrades two Cypriot banks

Bailout request before end of month

Editorial
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9

EURO zone member Cyprus strongly hinted on Monday it may have to apply for an international bailout before the end of this month, both for its banks and its general coffers.

“The issue is urgent. We know the recapitalisation of the (island’s) banks must be completed by June 30, and there are a few days left,” Finance Minister Vassos Shiarly told journalists.

Cyprus is under growing pressure to apply for aid to salvage its second-largest lender Cyprus Popular Bank, bowed by its exposure to debt-crippled Greece, ahead of a regulatory deadline of June 30.

It assumes the rotating EU presidency for six months the following day.

Responding to a question on whether any potential bid for aid would be focused on support for its banks, Shiarly said in his view it would be a comprehensive package, based on existing practice.

“When one applies to the support mechanism you take into account all the facts, including needs which may arise in coming periods. Consequently it would be a comprehensive request covering not only present circumstances and the recapitalisation of the banks but also future needs,” he said.

The cash-strapped country, shut out of financial markets for a year and running deficits, will need the equivalent of 10% of its gross domestic product just to prop up Popular, which is looking for an investor willing to fill a 1.8 billion regulatory shortfall, or the government must come to its aid.

Shiarly said he could not say how much a potential aid request could total. Cyprus has just over 2.0 billion euros in short-term debt maturing next year.

Timings wise, and because bailouts typically occur over weekends to minimise disruption to markets, Cyprus would in theory have a slot to make any application next weekend, when the focus will be on the Greek election on June 17, or the weekend of June 23-24.

Yet the island, representing 0.2% of the euro zone’s economy, has so far shown reluctance to take the plunge, spooked at the experience of Greece and worried that pressure could be applied to change its tax regime which is one of the lowest in the EU.

As potential leverage, it is negotiating separately with a third country in the hope that it could secure better bailout terms from its EU partners.

That country has not been named, but it is widely thought to be China. Cyprus received a 2.5 billion euro bilateral loan from Russia late last year, sidestepping its EU partners.

Earlier, Shiarly told lawmakers in Cyprus’s parliament that he had anticipated some conclusion to discussions at the end of May, but that he now expected news “very soon”.

Decision over gas terminal final

Editorial
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5

CYPRUS has already taken a decision for a Liquefied Natural Gas (LNG) terminal, Minister of Commerce Industry and Tourism Neoclis Sylikiotis said on Thursday, adding there is big interest by large international organizations to participate in this project.

Addressing the Cyprus Natural Gas Conference, Sylikiotis also said that the government will finalise in the coming weeks the State Hydrocarbons Company, the body that will represent the government in all future negotiations concerning natural gas issues.

Cyprus, he noted, is in a critical turning point with regard to the developments at home and internationally in the energy sector. “We have a clear picture of the developments being shaped, we know where we want to go and we proceed cautiously, but steadily towards our goal,” he said.

Last December Houston based Noble Energy, which has a concession for exploratory drilling in Cyprus’ block 12, announced that initial data that emerged from exploratory drilling and the evaluation checks carried out indicate the existence of a natural gas reservoir ranging from 5 to 8 trillion cubic feet (tcf) with a gross mean of 7 tcf.

Cyprus received 25 bids from companies and international joint ventures in the second licensing round for the island’s remaining 12 offshore blocks that took place on May 11.

Cyprus new homes down fifty percent

David Crowther
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4

ACCORDING to figures released by the Cyprus Statistical Service, the number of building permits issued in March stood at 808 compared with the 740 issued in March 2011; an increase of 9.2%.

However, the total area of these permits stood at 112,451 square metres, a fall of 43.5% compared with March last year and their value stood at €102,790, a fall of 40.7% compared with March 2011.

In March, building permits were issued for:

  • Residential buildings – 439 permits
  • Non-residential buildings – 256 permits
  • Civil engineering projects – 52 permits
  • Division of plots of land – 54 permits
  • Road construction – 7 permits

Over the first quarter of the year, the total area of licensed projects was 417.2 thousand square metres; a fall of 34.7% on the 638.7 thousand square metres during the first quarter of 2011. Similarly, the total value of these projects fell 35.9% to €409.5 million from €638.7 million in the first quarter of last year.

Construction of new homes

In March, the 439 permits were approved for the construction of 506 new homes comprising 288 single houses and 218 multiple housing units (such as apartments and other residential complexes).

This is a fall of 57.7% compared with March 2011 when building permits were issued for the construction of 1,196 new homes.

Source: Cyprus Statistical Service

During the first quarter of the year, the number of new homes for which permits have been issued has dropped 45.1% compared with the first quarter of 2011.

According to the Cyprus Statistical Service, building permits constitute a leading indicator of future activity in the construction sector.

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