THE GOVERNMENT together with the Central Bank of Cyprus are considering the possibility of asking the European Central Bank (ECB) to buy back government bonds, in a bid to lower yields on government paper which have spiked on the secondary market in recent months, Finance Minister Kikis Kazamias said yesterday.
“We have agreed it is an issue which is to be considered,” Kazamias told reporters.
Cyprus has seen its borrowing costs on secondary markets surge on the back of repeated downgrades by ratings agencies because of fiscal slippage and exposure of its banking sector to Greek debt.
Cyprus will have to find investors to refinance €1.0 billion in maturing debt in the first months of 2012 and this could help increase confidence among bond holders and reduce borrowing costs.
A 10-year bond issued to international investors in February 2010 bid at 11.9 per cent yesterday from around 6.20 per cent in early May.
Back in August, the ECB drove yields on Italian and Spanish debt sharply lower when it bought sovereign bonds issued by both countries for the first time.
Cyprus is in the process of taking measures to shore up the economy in a bid to avoid further downgrades, which could force the country to seek a bailout.
A first package of measures has already been passed while discussions are currently underway to formulate a second raft to be tabled in parliament next week.
Ratings agency Standard and Poor’s said on Monday Cyprus’ sovereign ratings remained on a credit watch pending the outcome of consultations for a new economic austerity package on the island.
“Should the parliament approve what we view as a credible budgetary consolidation package, and if potential losses associated with the restructuring plans of Greek sovereign debt remain at current anticipated levels, assuming all other factors remain the same, we could affirm our ‘BBB+’ long-term and ‘A-2’ short-term foreign-currency ratings of Cyprus,” S&P said.
But it said that if it judged that there was a lack of timely and credible fiscal adjustment, which it thought was likely to require significant spending cuts, or if the proposed Greek restructuring package results in bigger losses for Cypriot banks than currently anticipated, it could lower its ratings on Cyprus.
Yesterday, Kazamias voiced satisfaction and “cautious optimism” over the agency’s announcement.
“This proves there is a prospect that Cyprus’ rating can be stabilised with the second package, avoiding a further downgrade, which will be especially painful,” Kazamias said.
The minister said the government austerity measures are coming in three stages, culminating with the submission of the 2012 budget with which it aims to cut the deficit to 2.0 per cent.
Kazamias has this week started discussions with unions as part of preparing the second package, which includes freezing the cost of living allowance and cuts on social transfers worth around €200 million.
On the discussion table is also a proposal to cut 13th salaries in the broader state sector by 25 per cent.
An increase on VAT by two percentage points to 17 per cent will also be included in the second austerity package.
The minister declined to comment on his meetings with the unions.
“It is a recipe I followed during discussions on the first package. I judge that t his is the time for a lot of action and little talk,” Kazamias said.
