By Stelios Orphanides
The currently modest increase in the yields of government bonds, amid declining borrowing costs for most euro area members, reflects the slowdown of the Cypriot economic reform process three months before parliamentary elections, a senior Bank of Cyprus economist said.
“In a general trend of declining yields, the fact that the yield on Cyprus’ long dated debt increased reflects a slightly higher perceived risk, which in most part is specific to the country,” Ioannis Tirkides, senior officer of the largest Cypriot lender’s economic research division, said in an interview. “Cyprus is preparing to exit its economic programme with uncertainty looming large that it will fail to fulfil the prerequisites for the last tranche from the European Stability Mechanism, mostly in relation to legislation for the privatisation of state entities”.
Cyprus was not the only country to see its borrowing costs rise since the end of December, amid a general drop in yields on long dated euro area government debt resulting from expectations of a further loosening of monetary policy, Tirkides said.“Greece, Portugal and Cyprus, were exceptions in that order by magnitude,” he said.“Correspondingly, spreads with the German bund had dropped in most instances except for the same bundle of countries and Italy”.
The yields of Cyprus’s 10-year government bond rose 11 basis points since December 31 to 3.81 per cent on Thursday, while those of respective German securities fell 35 basis points to 0.28 per cent, according to a Bank of Cyprus document seen by the Cyprus Business Mail. As a result, the yield spread between the Cypriot and the German 10-year bond widened by 46 basis points in less than five weeks to 3.53 per cent.
Cypriot opposition parties, traditionally more sceptical towards reforms, dashed hopes for the successful completion of Cyprus’s adjustment programme with the parliamentary approval of a draft law setting up CyTA Ltd, a company that would take over the operations of the state-owned Cyprus Telecommunications Authority.The law is the remaining prior action for the successful completion of programme which expires in March, as Cyprus’s rating remains below investment grade.
Country specific reasons, caused by attempts to reverse or at least stall the reform process in Greece, Portugal and Cyprus, three of the four members of the euro area which received a fully-fledged bailout in the past six years, are to blame for these developments, Tirkides continued.
Greece, the country with the wrecked economy, which seven months ago came close to leaving the euro area and ruled for more than a year by a radical left government, “had seen by far the biggest increase in yield up 128 basis points, and spread,” Tirkides said.
Greece “is under a review process including negotiations with its creditors over a plan to restructure the country’s pension system,” he said. “This is a particularly sensitive issue in a country where the unemployment rate still exceeds 25 per cent and there is thus a threat of political instability and social unrest”.
Portugal, which elected Marcelo Rebelo de Sousa, the centre-right candidate as the its new president on January 24, is also facing uncertainty as its leftist government, in office for two months, is under growing pressure, he said. The country’s civil servant union, which has ties to the communist party, a member of the coalition, called for a strike on Friday.
The Portuguese coalition government, “transferred last December additional non-performing loans that were initially not thought to be there, to the bad bank that was created in 2014 to manage the failure of Banco Espirito Santo, revealing more risks than were previously apparent,” the Bank of Cyprus economist said. “Portugal also faces a controversy with its budget, where the more euroskeptic partners in the coalition government want to reverse some of the austerity measures that were implemented during the financial crisis thus causing friction with the European Commission”.
Tirkides added that euphoria that followed a January 27 deal between the Italian government and the European Commission that would help Italy manage a total of €200bn of bad loans accumulated in recent years, was premature.
While yields of 10-year Italian government bonds dropped 16 basis points to 1.43 per cent since December 31, the spread between it and the respective German bond widened to 1.15 per cent today from 0.96 per cent.