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Cyprus Could Become Next Euro Zone Trouble Spot

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- 10-year bond yield rises sharply to 7 pct area

- Cyprus fairly well placed to absorb Greek impact on banks

- But markets also worry about delays to fiscal reforms

- Can rely on domestic investors to buy bonds for some time

- But cannot stay out of international market indefinitely

Tiny Cyprus may become the next trouble spot in the euro zone's debt crisis, as credit rating agencies downgrade it because of exposure to Greece and rising yields suggest investor demand for its bonds is shrinking.

Cyprus does not face any near-term funding problem, and by many fiscal measures it is much healthier than Greece, Ireland and Portugal, which are receiving international bailouts.

But after a 0.8 percentage point jump in Cypriot government bond yields during May, some analysts think the country might conceivably have to seek a bailout in the long term.

"There is an increasing risk that Cyprus might join the GIP (Greece, Ireland and Portugal). It is not necessary, but many indications point towards Cyprus getting closer to asking for external help," said David Schnautz, an interest rate strategist at Commerzbank in London.

A Commerzbank research report last week recommended that investors refrain from buying Cypriot government bonds. "My view is that many investors look at Cyprus as being very, very close to Greece, and if they don't touch Greece anymore they won't touch Cyprus either," Schnautz said.

A euro-denominated Cypriot 10-year government bond issued to international investors in February 2010 was bid at 7.01 percent on Thursday, up from around 6.20 percent in mid-May and 4.20 percent in the middle of last year.

During the crises in Greece, Ireland and Portugal, investors viewed the 7 percent level as a danger signal for 10-year bond yields, believing governments might be unable to afford to fund themselves over the long term at such an expensive level.

Cyprus accounts for only about 0.2 percent of the 17-nation euro zone's economy and has gross financing needs of roughly 2 billion euros this year, which is tiny compared to the 110 billion euro size of Greece's three-year bailout programme.

So the European Union could easily afford any rescue of Cyprus. However, a fourth bailout in the euro zone could unsettle markets by underlining the way in which the debt crisis can spread as problems in one country affect other states.

GREECE

With its banks sitting on an estimated 5 billion euros in Greek sovereign debt and its economy heavily exposed to Greece through trade, Cyprus has been downgraded by all three major credit rating agencies over the past several months as the Greek crisis has worsened.

At the end of May, Fitch Ratings cut Cyprus by three notches to A- with a negative outlook because of the risk of a Greek debt restructuring that might force the Cypriot government to spend money on recapitalising local banks.

Cypriot banks have taken steps to boost their capital in the past year and Fitch said they were "relatively well placed" to withstand even a 50 percent cut in the principal of Greek bonds.

It estimated the cost of recapitalising the banks to a Tier 1 ratio of 10 percent under that scenario would be 2 billion euros or 11 percent of gross domestic product.

Cyprus would actually be in better shape than many other euro zone countries to shoulder such a burden. Its debt to GDP ratio is projected by the EU at 62.3 percent this year, lower than the weighted average for the zone; Greece's ratio is 157.7 percent and Ireland's, 112.0 percent.

Its projected budget deficit this year is 5.1 percent, well below Greece's 9.5 percent and Ireland's 10.5 percent.

But another issue is also worrying investors: the Cypriot government's delay in cutting back high expenditure on a bloated civil service and addressing pension reform. The public payroll accounts for 30 percent of annual budget spending, and if steps are not taken, it could hit 50 percent in coming years, central bank governor Athanasios Orphanides told parliament last year.

"It's easy to say the markets and rating agencies are jittery right now, but something must be done to address concerns," said Michalis Florentiades, head of economic research at Hellenic Bank.

The Communist-led government has been tussling with a now opposition-led parliament for more than a year on how to bring down the budget deficit, and had a proposal to raise corporate tax blocked last year.

As a government rooted in labour movement activism, it has proceeded cautiously in cutting the civil service. There has been a chill in relations with Orphanides, whose frequent references to reform irked Communist President Demetris Christofias to the point where he said the central banker was talking too much.

HOLDING OUT

The Finance Ministry says the significance of the rise in secondary market bond yields should not be overestimated. A report by the Public Debt Management Office in March described it as an illiquid market with no primary dealers, where a lack of volume data hindered an objective assessment.

This week the government showed it could raise money comfortably in the domestic market; it issued its first 10-year bond for domestic investors since 2007 with an average yield of 6.252 percent. Including a five-year issue, it sold a total of 79 million euros of debt.

"Traditionally Cyprus has been able to shun international markets in favour of domestic," said economist Fiona Mullen. "The local banks were always very liquid; they have only gone to international markets to get a benchmark in the past."

Between 2004 and 2007, when Cyprus was running similar deficits to today, it borrowed more than 7 billion euros from local banks in short-term Treasury bills. It did not tap the international market between 2004 and 2009.

But staying out of the international market for too long would be risky for Cyprus; it could lose touch with foreign investors, making it more difficult to raise money from them if banking or economic problems required the government to raise more money than expected.

Authorities say that "subject to market conditions", they aim to issue a bond to international investors, but when this would happen is unclear. It is also considering private placements.

"We will need to go to international markets at some point, so now is the time to send a message that we are serious about addressing our problems," said Michael Sarris, a former finance minister.

Their banks offer higher rates of returns for savings, so says Marin Lewis and his ilk, like Glacier bonds?

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Son of a..... I was considering a job out there recently! (Chef for chavvy tourists)

Chef?! in Cyprus?

When I was there a few years ago (not by choice it was a work arranged visit) most of the eateries were of the full fried English breakfast level.... It was a depressing sight.

To be fair we did find some lovely eateries but these were away from the chav sector and run by Cypriots.

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Chef?! in Cyprus?

When I was there a few years ago (not by choice it was a work arranged visit) most of the eateries were of the full fried English breakfast level.... It was a depressing sight.

To be fair we did find some lovely eateries but these were away from the chav sector and run by Cypriots.

I don't consider myself a chav, but I do enjoy a full fried English breakfast. In fact, I never eat anything else (for breakfast). Bacon, eggs, kidneys, fried potatoes, nice strong cup of PG Tips etc. :D

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Chef?! in Cyprus?

When I was there a few years ago (not by choice it was a work arranged visit) most of the eateries were of the full fried English breakfast level.... It was a depressing sight.

To be fair we did find some lovely eateries but these were away from the chav sector and run by Cypriots.

Actually it was head chef of an anglcised Chinese resturant there, pay wasn't great but included accomodation AND cyprus has a military BPA afiliated drop zone (I.e. the British tax payer :)B):D pays a massive subsidy for the jumps) which meant it might be good for a bit of time away for a bit. B)

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Actually it was head chef of an anglcised Chinese resturant there, pay wasn't great but included accomodation AND cyprus has a military BPA afiliated drop zone (I.e. the British tax payer :)B):D pays a massive subsidy for the jumps) which meant it might be good for a bit of time away for a bit. B)

Go for it, it certainly beats living in a rented slave box in a cold, grey island...

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Go for it, it certainly beats living in a rented slave box in a cold, grey island...

couldn't agree more.

I have a house there by the beach and a plot of land on the mountainside, ready to build my 'dream' home on.

All bought for less than the price of a 1 bed flat in zone 2 London. Go figure.

IMG_2079.JPG

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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