THE CYPRIOT banking sector expects to draw up to €3 billion from the introduction of legislation allowing for covered bonds, part of government plans to boost liquidity, the Finance Minister said yesterday.
Cypriot commercial banks have so far been unable to tap cheap funding on offer from the European Central Bank (ECB) because the legal framework for covered bonds does not exist. Despite past reservations, the Finance Ministry and the Central Bank are working together to speed up the implementation of the new bill.
“All the necessary procedures are in order based on the blueprint the Central Bank has prepared and we expect that by the end of the year it will be ready to go before parliament for approval,” Finance Minister Charilaos Stavrakis told reporters yesterday.
Asked how much money they expected the covered bonds scheme to make available to banks, Finance Minister Charilaos Stavrakis said:
“Initial estimates suggest that it would be in the region of two to three million euros.”
Cyprus is the only euro zone country to register positive growth for the first six months of 2009 and the Finance Ministry is still forecasting a one per cent growth for this year.
However, an IMF report in June painted a bleaker picture of the outlook of the Cypriot economy and warned of the need for structural reforms in fiscal policies, including the “rapid implementation” of the legal framework for covered bonds as a way to boost bank liquidity for the second half of the year.
Both the Finance Ministry and the island’s business community have highlighted the need for cheaper cash to be made available by the banking sector for the benefit of small and medium size enterprises (SMEs) in particular, especially as Cyprus prepares to feel the brunt of the economic slowdown with lower tourist revenues and an overstretched state payroll.
“We are confident that the gains from this [the covered bonds scheme] will be passed on to the customers in the form of lower loan rates,” Stavrakis said.
Cypriot commercial banks signed a €228 million loan agreement with the European Investment Bank (EIB) last month and the island’s main banks have expressed their support of the covered bonds scheme that is set to ease access to cheap European liquidity. However, questions still remain whether the government is doing too little too late.
“Should the implementation of the covered bonds not be in place until the end of the year, which looks likely given the legal system we have in Cyprus, we would face the big liquidity problem at the end of the year. This would be neither good for the banks, nor the state,” Bank of Cyprus Group General Manager Vassos Shiarlis said in an interview with financial news website stockwatch.com.cy earlier in the week.
Yesterday, Stavrakis took a more positive stance on the special three-year bonds that have been a cause of conflict between the Ministry and the Central Bank in the past, saying that the two institutions were now on the same page and looking into other possible ways to boost liquidity that “did not exclude the issuing of special bonds”.
Central Bank governor Orphanides last month said that had the government followed his advice and issued special three-year bonds which could have been used as security to tap into cheap ECB cash back in June, then lending rates on the island would have been at least 1.0 per cent lower than they are now.
