The government will inject some €1.0 billion into the island’s commercial banking system next week in a bid to bring borrowing costs to consumers down, the Finance Ministry said yesterday.
The sum would be in the form of eight-month treasury bills, Finance Minister Charilaos Stavrakis said, and would be allocated to banks based on their market share.
“This will create additional liquidity in the market, which by definition should help bring down rates,” Stavrakis told newsmen after a meeting with bankers in Nicosia.
The move will allow cheaper financing for commercial banks and authorities expect them to pass it on to consumers, he said.
The scheme is an extension of a €1.4 billion issue by authorities last year, done to address a liquidity squeeze, but the extra liquidity has not produced the hoped-for result.
The current treasury bills expire in late December.
Banks have been under pressure to drop their borrowing rates to consumers, but say they are trapped in the interbank system paying high rates, which in turn forces them to offer high rates to keep deposits amid growing domestic competition.
Under the scheme, the state will be borrowing the €1 billion from commercial banks, who will get their money back by taking out a loan for the same amount from the European Central Bank, but at a lower interest rate, at 1.25 per cent, the ECB’s base rate.
Banks will be able to use the notes as collateral with the EBC. The nominal borrowing rate they will be charging the government is 1.75 per cent.
Stavrakis spoke of a “consensus and a commitment by the banks and cooperatives that, within the boundaries of free competition…they shall make a coordinated effort to scale down their interest rates.”
“This is a practical decision, of vital importance, which is to be implemented immediately,” he added.
Asked how soon consumers should expect the cost of borrowing to fall, Stavrakis this depended on whether banks would honour their commitment.
“There is no legal method to force any private business, or banks or cooperatives to cut the cost of borrowing,” he offered.
Banks that did not play ball by refusing to slash their lending rates would not be named and shamed, Stavrakis added in response to a question.
However, in a move aimed at boosting transparency in the market, banks have agreed that from now on they will post their average loan and deposit rates on a monthly basis.
Stavrakis said also the government would be moving ahead with plans to issue a €1 billion foreign bond in June, in order to address existing public financing needs of about €2.5 billion over the next 10 months. It would be the first large-scale borrowing move since the country joined the EU in 2004.
Cyprus, a member of the euro zone since 2008, has been absent from the international bond markets for the past five years, redeeming its debt with fiscal surpluses.
The island is expected to register a deficit this year, by up to one per cent of its gross domestic product.
Yet it was only last Friday that Stavrakis brushed off the notion of taking advantage of cheap money from the EBC in order to inject more liquidity into the banking system.
His main concern, he said at the time, was that the extra liquidity should not worsen other significant indicators such as the public debt, the deficit, public accounts and the real economy.
Technically speaking, the €1 billion loan from the banks expires before the end of the current fiscal year, therefore in accounting terms this sum will not appear in the public debt but in the current account.
