Our View: How long can local funds meet government’s financial needs?

THE FINANCE Ministry has raised another €78.8 million from the local market which is being increasingly used to fund the government’s financial needs – a couple of months ago the ministry raised €300 million locally. The five-year government bonds had a yield of 5.56 per cent and the 10-year bonds a yield of 6.5 per cent, which shows that the cost of state borrowing is steadily rising, even locally.

In the secondary market Cyprus government bonds already have a yield of 6.5 per cent, something which, reportedly, causes embarrassment to the finance minister Charilaos Stavrakis, because, not so long ago, government bonds had been sold to institutional investors abroad with a yield of 4.5 per cent. The truth is that if he had tried to sell government bonds abroad now, the interest rate would have been closer to 6.5 per cent, a yield that reflects falling confidence in the government’s management of public finances.

But even locally, bonds and treasury bills are being bought by state-controlled organisations, the boards of which consist of government appointees. Half of the €78.8 million was taken from CyTA – €10 million from the Authority’s coffers and the rest from its staff pension fund. As for the €300 million, a portion was bought by a Co-operative Bank and another part by the government-controlled House Financing Organisation which, not surprisingly, is now short of funds to lend to applicants eligible for housing loans. Commercial banks also helped out.

For how much longer though would the government be able to draw funds locally, reducing the liquidity of the market and pushing the economy deeper into recession? Co-ops and semi-governmental organisations do not have the funds to keep lending money to the government, while local banks, over-exposed to Greek bonds, would be very reluctant to bail out the government again.

Why does Stavrakis not go abroad to borrow money, instead of raiding state organisations and reducing liquidity locally? We suspect he is afraid to go abroad because he might have difficulty finding any big bank to under-write a sale of government bonds. If he found a bank, what interest rate would he have to offer to sell the bonds? The only way to prove these are not among his considerations would be for the government to try to borrow money abroad.

But the downgrades by the rating agencies and the continuing unwillingness of the government to take any measures to tackle the structural problems of the economy, would suggest that Stavrakis would not dare try to borrow money from abroad. The big problem is that the government’s borrowing requirements cannot be met by the local market for much longer.