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Cyprus said to canvass ECB on debt swap easing bank burden

Nikos Chrysoloras & Georgios Georgiou

Cyprus wants to start talks with the European Central Bank on a debt swap that would ease the burden on the country’s largest lender, two people familiar with the discussions said.

In a meeting with ECB President Mario Draghi in Frankfurt on Wednesday, Cypriot President Nikos Anastasiades raised the possibility of converting emergency central-bank loans granted to Bank of Cyprus at the height of the country’s financial crisis into longer-term debt, said the people, who declined to be identified because the talks are private.

A restructuring of the loans, which are known as Emergency Liquidity Assistance, would bolster the Cypriot government’s efforts to guide the country out of a rescue program initiated during turmoil in March last year that almost forced it out of the euro. Ireland, which exited its bailout in December, conducted a similar debt swap in early 2013.

“The purpose of the meeting was to review the situation in the financial system and its strengthening through policies in which the ECB can play a decisive role,” the Cypriot presidency said in a statement.

Cypriot Finance Minister Haris Georgiades and the country’s central banker, Chrystalla Georghadji, accompanied Anastasiades to the meeting with Draghi. Cyprus wants to convert 5.5 billion euros ($7.4 billion) into longer term debt, one of the people said.

A spokesman for Anastasiades declined to comment on the matter. A spokeswoman for the country’s central bank didn’t respond to a phone call seeking comment.

“The ECB acknowledges the progress that has been made so far on budget consolidation, structural reforms and stabilization of the banking sector,” the Frankfurt-based central bank said in a statement. “Reforms should be continued for the benefit of all Cypriot citizens.”

The move is part of Cyprus’s effort to repair its banking system after a crisis that prompted a 10 billion-euro rescue package in 2013. As part of that bailout, Bank of Cyprus absorbed its nearest rival, Cyprus Popular Bank Pcl, and was then recapitalized last July through the conversion of large deposits into shares.

The absorption meant that Bank of Cyprus also assumed the ELA liabilities of the resolved lender. At the end of March they stood at 9.5 billion euros, or 58 percent of the Mediterranean country’s gross domestic product.

Ireland, which exited its international bailout program at the end of last year, already conducted a similar operation, announcing in February 2013 that it would swap so-called promissory notes used to rescue Anglo Irish Bank Corp. for long- term bonds with maturities of up to 40 years. The deal drew criticism from Bundesbank President Jens Weidmann, who said it had a “fiscal nature.”

Draghi, questioned on the Anglo Irish swap after the interest-rate decision that month, told reporters that policy makers “unanimously took note of the Irish operation” and declined to comment further. The ECB said this year that the arrangement “raises serious monetary financing concerns.” [Bloomberg]

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