Greek Cyprus faces imminent bailout threat, biggest bank says

"With our inaction we are risking the ability of refinancing the state and the consequences will be immediate and serious," Bank of Greek Cyprus said in a statement.

Greek Cyprus faces imminent bailout threat, biggest bank says

Greek Cyprus may soon have to seek an international bailout, becoming the fourth state in the euro zone to request a rescue if it does not take urgent action to repair its finances, the island's largest commercial bank said on Monday.

"With our inaction we are risking the ability of refinancing the state and the consequences will be immediate and serious," Bank of Greek Cyprus said in a statement.

"There is an imminent threat of Greek Cyprus joining the European Union support mechanism, with whatever drawbacks that will entail."

Since the euro zone's sovereign debt crisis erupted last year, the EU and the International Monetary Fund have announced multi-year bailouts of Greece, Ireland and Portugal totalling 382 billion euros ($550 billion).

A rescue of Greek Cyprus, which accounts for only about 0.2 percent of the 17-nation euro zone's economy and is expected to have gross financing needs of no more than several billion euros this year, would not strain Europe's financial resources.

But it would be an unwelcome reminder of how the region's debt crisis can spread as problems in one country affect other states. All three major credit rating agencies have downgraded Greek Cyprus in the last several months because its banks are sitting on an estimated 5 billion euros in Greek sovereign debt and its economy is heavily exposed to Greece through trade.

On Friday, Standard & Poor's downgraded the island again by one notch to BBB+ and warned that another cut was possible, citing the government's inconsistent commitments to spending cuts as well as exposure to Greece.

Discussions on spending cuts were left in disarray last week, as opposition parties accused the government of backtracking on reform pledges and the cabinet resigned in response to public anger over a munitions blast that sparked an energy crisis by destroying the island's biggest power station.

Wider deficit

Greek Cyprus received more bad news on Monday when data showed the central government deficit widened sharply in the first half of this year to 3.47 percent of gross domestic product on a cash basis, from 1.87 percent a year ago. Revenue fell 1.42 percent while expenditure was 9.15 percent higher.

Authorities have said they are aiming for a general government public deficit, which also includes accounts for local governments and some semi-governmental corporations, of 4.0 percent of GDP or less for 2011, after a 2010 shortfall of 5.3 percent.

But that forecast was made before the July 11 blast caused energy shortages and slapped the state with a bill which, according to opposition parties, could reach 3 billion euros. Preliminary finance ministry assessments have slashed the island's growth outlook this year to zero from expansion of 1.5 percent.

A euro-denominated Greek Cypriot 10-year government bond issued to international investors in February 2010 was bid at 10.54 percent on Monday, up from 9.71 percent on Friday and around 6.20 percent in mid-May.

Government spokesman Stefanos Stefanou said last week that the island had already satisfied its financing needs until the end of this year, at lower rates than current secondary market yields, and insisted a bailout was not inevitable.

Authorities are looking at options for extra financing after that, the finance ministry said on Monday.

But analysts believe Greek Cyprus could not continue financing itself over the long term if it had to return to the market at current rates.

Credit default swaps for Greek Cyprus, used to insure against the threat of a sovereign default, hit a record high of 707 basis points on Monday, more than triple their January level and closing in on levels near 1,000 bps for the euro zone's weakest states, according to data monitor Markit.

Reuters

Last Mod: 01 Ağustos 2011, 17:41
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