THE cabinet yesterday approved a deal for Cyprus to borrow €2.5 billion from Russia and authorised the finance minister to finalise the loan as soon as possible.
“It is a bilateral agreement (between Cyprus and the Russian Federation) starting January 2012,” government spokesman Stefanos Stefanou said.
“(This deal) opens yet another market for the financing of the Republic of Cyprus in addition to the traditional European market, and creates even more prospects for deeper economic cooperation between Cyprus and Russia,” Stefanou said.
Cyprus would have to pay off the loan in 4.5 years, paying a 4.5 per cent interest rate, he said, with no strings attached. The interest rate is less than half market rate, Reuters reported.
There is “no condition nor any commitment” linking the loan with potential natural gas reserves found off the shores of Cyprus, Stefanou said.
And Cyprus has the right to pay off the loan earlier without any penalties.
Stefanou said the loan, together with measures to secure medium term fiscal stability, would cover short and medium term financing needs and restore foreign investor trust that would in turn lift pressure on the bond yields in the secondary European market.
The cash would also bolster the stability of Cyprus’ financial system and encourage further foreign investment and deposits, while at the same time strengthen domestic banking liquidity, Stefanou said.
Cyprus has seen its borrowing costs spike in the past year on the back of fiscal slippage and exposure of its banks to Greece, a factor which has pressured its credit ratings. the Republic borrowed 91 day treasury bills last week from the domestic market with a yield of 4.60 per cent.
However Its 10-year benchmark bond, stuck with a yield over 11 per cent on the secondary market for the past two months, was bid at 10.60 percent yesterday, according to Reuters data.
Meanwhile, Cyprus has been named as a country that could face EU sanctions under new laws on cross-border economic governance that will allow EU Economic Affairs Commissioner Olli Rehn impose penalties on European Union states that repeatedly break shared commitments on debt and deficit ceilings.
News agency AFP reported that the laws will be applied using recommendations drawn up according to yardsticks that include the EU executive’s bi-annual economic forecasts, covering everything from growth to unemployment.
The measures will come accompanied by recommendations from Brussels and will be enforced, officials said, after years when many member states simply ignored the directives, AFP said.
“But now these new tools have bite and Commissioner Rehn has said he will use them,” his spokesman Amadeu Altafaj said.
He did not say which countries would definitely face the threat of sanctions but named “Cyprus and Belgium” as examples of those which could be at risk if they do not make significant adjustments to their public finances within the next couple of months, AFP said.
The government has said that its 2012 budget is geared towards reducing its fiscal deficit to 2.3 per cent from around 6.0 per cent in 2011.
The budget is usually discussed in December though the current political climate – in the aftermath of an inquiry finding the president personally responsible for the July 11 blast that killed 13 men — could affect the vote.
The opposition has the majority in parliament and theoretically they could refuse to approve the budget in a bid to force President Demetris Christofias to step down.
Ruling AKEL leader Andros Kyprianou yesterday urged his political rivals to leave the economy out of the ongoing row.
“Let us fight on any other issue but cooperate on the economy,” Kyprianou said.
