The chances of Cyprus’s new government cementing a bailout from Brussels by the end of this month seem to be evaporating fast as contentious negotiations over the terms of the deal continue. Discussions about the nature of assistance from the EU have been bogged down in disputes over the potential bail-in of bank depositors and the role of Russia in the island’s finances.
A more realistic deadline is provided by the €1.415 billion of 3.75% 2013 bonds, which fall due on June 3. These bonds must be restructured or defaulted upon.
Nicosia first requested aid from the troika in June, so if talks go down to the wire it will have taken a full year and a looming bond redemption to force the situation to a close.
Sources close to the negotiations tell Euromoney that the prospect of depositor bail-in is very real. While initially it was assumed that the contagion risk would prevent such a move, the thinking is now that depositors in healthy eurozone financial institutions view the situation in Cyprus as sufficiently unique and isolated that such a move would not trigger deposit flight.
“UK depositors lost money in Iceland, Spanish depositors lost money in Bankia,” says one. “This will not trigger contagion.”
However, the very public debate over depositor bail-in will almost certainly have dented the impact that such a move will have on Cyprus’s finances. Depositors with more than €100,000 in Cypriot banks – Russian or not – will undoubtedly have done all they can to remove it by now.
So even if depositor bail-in in Cyprus becomes reality, this victory might turn out to be a pyrrhic one. Bank of Cyprus reported that €1.7 billion of deposits left the bank in January and recent reports suggest €1 billion left Cyprus’s banks in the first two weeks of February alone.
As it is, the government faces three outcomes by June 3: negotiate a bailout, restructure the bond or default. Restructuring the bond, which was issued under English law, in this time frame would be extremely complicated and challenging so agreeing to any bailout terms to pay it off is really the only option.
The big question in Cyprus is who writes the cheque? The EU or Russia? Russia has already done this once and might be persuaded to do it again but only as part of a wider package. This will inevitably involve the wipe out of all equity and junior debt in the banks and maybe even the senior debt. It will also leave the island with a debt to GDP ratio of more than 140%.
A troika delegation was in Cyprus during the week on March 4 in an attempt to ascertain the financial state of semi-governmental organizations such as the electricity and telecoms utilities, presumably with a view to privatization.
