Markets have funds to lend, but they also have brains

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By Marios Mavrides*

The next time Cyprus taps international markets, its borrowing cost will be higher. As Cyprus prepares to exit its adjustment programme without having implemented all actions that were part of the agreement, markets don’t seem to be particularly happy about it.

According to the latest data, the yields of the Cypriot 10-year government bonds rose by 20 basis points since the end of December. Even though this increase is not spectacular, it does make a difference when we are talking about loans amounting billions of euros. A €1bn loan will cost €20m more every year.

What’s causing more concerns in the case of Cyprus is that its borrowing costs are on the rise while in the rest of the euro area they are going down (with the exception of Greece and Portugal).

Germany’s borrowing costs, which serve as a reference, fell by 28 basis points in January the yield of its 10-year bond is around 0.3 per cent today.

Germany refinances its maturing debt with 0.3 per cent while Cyprus does so at an annual cost of 3.82 per cent, which means that Cyprus’s spread is 3.52 per cent. Cyprus has the highest borrowing costs in the euro area after Greece, which borrows at 9.16 per cent.

Actually, Greece doesn’t get any loans from markets but from the European Stability Mechanism. It is noteworthy that Cyprus could reduce its borrowing cost from the excessive levels of 2013 (of up to 14 per cent) to 3.62 per cent until few weeks ago, mainly thanks to the successful implementation of the adjustment programme.

In recent weeks however, we are witnessing a delay in the implementation of the terms of the bailout which displeases markets. The reluctance demonstrated by opposition parties to cooperate, and their resistance to privatisations disappointed financial markets.

In addition, amendments to the foreclosure and insolvency legislation translate into obstacles in the process of consolidating the banking system smoothly, and in the reduction of non-performing loans. This therefore begs the question, why does a country with half of its banks’ loan portfolio non-performing make the consolidation of its banking system so difficult? It also begs the question of why a country with its economy chained by various interest groups and establishments, refuses to get rid of them. Markets are not stupid; they do have funds they want to lend but they also have brains, much more than what we believe. Unless the adjustment programme is completed as agreed and we also do what it takes to strengthen our economy, our borrowing cost will keep rising.

(*) Marios Mavrides is an economist and Kyrenia deputy for DISY

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Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]

  • Brian Whiffen

    most of the commentators have brains as well, we have been warning of this for month now, so it is down to the population to bite the bullet, and elect a government with a working majority who will cut governmental cost and privatise the SGO’s, whilst taking the unions in hand by passing legislation to curtail some of their power, if not Cyprus will follow Greece into the mire of another tougher bail out.

    • Rory Keelan

      or no bail out at all. As with the bail in of deposits, C yprus is small enough and far enough away that it can be used as an ‘example’.

      • Sandie

        On January 1st, 2016, a new bail-in system has gone into effect for all
        European banks. This new system is based on the Cyprus bank bail-ins
        that we witnessed a few years ago.
        The key new rule is that no bank can be bailed out with public money until creditors accounting for at least 8 percent of the lender’s liabilities have stumped up. So-called bail-ins typically mean wiping out creditors’ investments, slashing their value or converting them into shares in the bank. Uninsured depositors could get caught along with professional investors.
        My money is not in Cyprus anymore.

  • Alexander Reuterswärd

    Agree and the coming months will be very interesting with elections coming up to speed up crisis if it goes the wrong way

  • Pc

    A man worthy of a vote.

  • Andreas Louca

    I agree with Alexander and Brian . I have been saying that the information from the Government on the economy is a smoke screen ,, if we look at the unemployment of 15.7 % , our largest bank losing 400 million , 4 years after bail in , and no one has taken in the number that have immigrated for work overseas, means the the economy is not doing so good. Now it appears we will be paying more for our borrowings , and this despite our tourist industry having had one best years since 2001..Coupled to that we are looking for a solution to the Cyprus Problem , which entails greater financing if we are to achieve a settlement , both in compensation , restructuring , and costs of three governments .m and we have it to resolve the title deeds
    mess and the effect on the banks balance , and the implementation of foreclosure on NPL and the effect this will have on our bank balance sheets., and possible business and unemployment .
    looks like an interesting year ahead not full of hope , as the corruption by our ruling elite keeps appearing and our elections in May will ensure their continued occupation of the seats of power and a continuance corruption. Its our whole system that has to be changed , our Constitution, our electorate systems , our judges and lawyers and our appointment to semi state bodies , our education .. our police force to implement the laws ( you don;t have to issue tickets and fines for every violation , just insure that when on the roads you warn motorist to slow down , and been seen that they observe the laws themselves ).)

  • Jeremy Rigg

    Good heavens , can this be a second Cypriot politician talking some sense? Surely not.

  • costaskarseras

    Mr Mavrides, from people like, you we take advice with a pinch of salt and your preaching is not taken seriously. People of your profession, together with the bankers, carry a lot of responsibility for the economic disaster that hit the world, despite the numerous Nobel honours that have been showered on the economists. The first time the Cypriot people were victims of an economic crime was the Stock Exchange scandal. The elementary principle is not to invest money on the stock market unless you can afford to lose it. Instead, the economic minister of the then DISY government, Mr Takis Glerides urged on the television the banks to lent more money to ordinary people, who knew nothing of finance, to buy more shares in order to save the stock exchange.

    Now you are advocating (“In addition, amendments to the foreclosure and insolvency legislation translate into obstacles in the process of consolidating the banking system”) to make families homeless in order to save the criminal banks.

    “The Markets are not stupid; they do have funds they want to lend but they also have brains, much more than what we believe”. How clever of you, we also know that the markets are like vultures, they will go anywhere and to any length to secure maximum profits regardless at what cost. Low wages, long working hours, unsafe working conditions, zero hour contracts are becoming the norm, even in rich countries.

    As for the Markets’ brains, they are programmed to the only and one direction, profit and allow nothing to stand in their way, not even going to war.

  • Argent

    This is spot on, good for Mr Mavrides, but if he can see and understand this, why cant the rest.