Cyprus GDP upgrade seen as boosting bailout exit plans

A European Union accounting change has improved Cyprus’s public-finance outlook more than any other euro-zone nation, raising the prospects it will exit a bailout program ahead of schedule and sell bonds this year.

The Chart of the Day on Friday showed the Mediterranean island nation’s debt burden dropped almost 10 percentage points to 102 percent of gross domestic product after the EU announced changes on measuring national economic output and public debt on October 21. The amendments, which include changes to how financial services are recorded, added more than 1.5 billion euros ($1.9 billion) to the nation’s GDP.

President Nicos Anastasiades said in an October 21 interview that he plans to sell debt for a second time this year and end the country’s 10 billion-euro International Monetary Fund and EU rescue program in 2015, a year early. Cyprus became the fifth euro-area country to be bailed out in March 2013 after the region’s debt crisis left its biggest banks insolvent.

“The debt-to-GDP figures are looking a lot better,” said Fiona Mullen, the director of Sapienta Economics in Nicosia. “In the short term, I’m sure they could tap the market if the price was right.”

Still, illiquidity in Cypriot debt hinders the country’s ability to lure investors, according to Mullen. The five-year bond yield fell four basis points to 5.87 percent at 10:22 a.m. in Athens today, compared with an initial 4.85 percent when it was sold in June. The 750 million-euro sale marked the country’s first major foray into international bond markets in four years.

Another risk is that the banking system’s bad loans, which the IMF calculates at 57 percent of the total, will weigh on GDP growth, according to Mullen. Cyprus’s economy will expand 0.4 percent next year after a 5.4 percent contraction in 2013 with a 3.2 percent drop this year, according to IMF forecasts.


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