Cyprus’s Georgiades bets on economy for Irish-style bailout exit

Cyprus could benefit from strong bank stress test results and positive economic signs to pull off an Irish-style bailout exit and make a full return to the bond market, Finance Minister Harris Georgiades said.

“The only way out of the bailout is implementing the fiscal adjustment program, like the Irish did,” Georgiades said in an interview in Nicosia. “The bailout exit will come when market access is fully restored.”

A year and a half after becoming the fifth and last euro- area nation to enter an international bailout and after a forced loss on bank bondholders and deposits of more than 100,000 euros ($126,000), Cyprus is seeking to bolster market confidence after risks of an early Greek bailout exit triggered a sell-off in bonds and stocks earlier this month.

The country is ready to issue a new bond “once market conditions allow,” Georgiades said. His government “plans to move forward with the next step of the market return soon,” he said. The continuation of reforms and fiscal consolidation along with improved debt projections are possibly “the most important development” for Cyprus to be able to achieve a better interest rate on bond markets, he said.

Structural Reforms

While the country’s euro area and International Monetary Fund creditors have said a successful privatization program and changes in legislation on foreclosures are crucial, a political dispute in Cyprus over foreclosures has delayed a review of the loan program, postponing disbursement of a 436 million-euro tranche. The IMF also noted signs of “reform fatigue” in its Oct. 22 report.

“Delays in the country’s review don’t help” a return to the markets, Georgiades said, adding that “this problem is not equivalent to derailing the country’s economic adjustment program.” The country’s Supreme Court is scheduled to announce a decision on foreclosure legislation within the next week.

Georgiades said a Cypriot exit from the bailout program could follow the Irish example. Ireland, after implementing a series of reforms praised by its EU counterparts, last year became the first European country to successfully exit an international bailout, achieving an immediate return to bond markets.

EU Review

Cyprus’s debt burden dropped almost 10 percentage points to 102 percent of gross domestic product after the EU announced changes in measuring national economic output and public debt on Oct. 21. The amendments, which include changes to how financial services are recorded, added more than 1.5 billion euros to the nation’s GDP.

Cyprus may present a primary budget surplus a year earlier than expected in 2015, Georgiades said in the interview. Official estimates in the country’s budget plan released Oct. 9 show a primary budget deficit of 1 percent for 2015 and a return to surplus from 2016.

“It’s very important for the country to continue its reforms with the same intensity, despite the positive signs of the economy,” Georgiades said, adding that a bailout exit and return to the markets should not signal the end of reform.

The country tapped markets for the first time after its bailout in June, raising 750 million euros in a sale of five- year notes. [Bloomberg]

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