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