Investors’ demand totalled €1.9 billion in the sale made through a syndicate of banks, and the yield was set at 4%, below initial expectations, a lead manager told IFR, a Thomson Reuters news and market analysis service.
By contrast yields on debt issued by Greece, the country which effectively forced Cyprus to seek an international bailout in 2013, are only slightly below their highest levels since Athens restructured its debt in 2012.
Greek 10-year bonds yielded 11.62% on Tuesday and its two-year bonds 21.54% – and that marked a 129 basis point drop on the day.
“We have bought more Cypriot debt in today’s new issue,” said Mark Dowding, portfolio manager at BlueBay Asset Management. “The performance of Cyprus’s economy since they entered the (bailout) programme has been impressive.”
Dowding said Cypriot bonds were trading cheaply due to the Greek crisis. “But in our estimation that risk is mispriced, partly because investors are making too much of a simplistic link between the two countries,” he added.
Cypriot banks suffered huge losses on their Greek government bond holdings after Athens wrote off a large part of its debt held by private creditors, forcing Nicosia to take €10 billion ($11 billion) in aid from the European Union and IMF.
The Cyprus government took drastic action to tackle the crisis, seizing money from bank deposits, imposing capital controls and holding a debt swap that ratings agencies declared a default. The country’s second biggest bank was wound down.
The policies are starting to bear fruit. Cyprus already made a bond issue in June last year and abolished the remaining controls on capital leaving the country earlier this month. Banks have successfully raised capital in the market.
IMMUNE TO GREECE
Cypriot President Nicos Anastasiades declared his country immune to the Greek crisis earlier this month.
But bankers not involved in Tuesday’s deal had doubts about the creditworthiness of the Cypriot bonds, despite assurances from the issue’s lead managers.
“I know that leads will argue that there’s no connection with Greece, but I think in the minds of investors thereis a connection – the two stories are tied together,” said one specialist in sovereign debt sales outside the deal.
Barclays, HSBC, Morgan Stanley and Societe Generale CIB are lead managers in the deal.
Nevertheless, a banker involved in Tuesday’s deal said it was a good sign for other “peripheral” euro zone members, the Mediterranean countries, which suffered most in the bloc’s debt crisis. “Cyprus seems to have positioned itself as a recovery story,” said the banker. “I think we have shown the way for all the peripheral countries and demonstrated that the market is open despite Greece.”
Seven-year Italian yields trade below 1%, while equivalent German Bund yields are below zero.
The contrast to Greece, with which Cyprus has historical, linguistic and cultural connections, is striking.
Greece locked out of bond markets and teetering on the edge of bankruptcy, is at odds with its creditors over reforms needed to release vital funds to keep it afloat.
It held fruitless talks with its euro zone partners last Friday with time running out on a deal. German Finance Minister Wolfgang Schaeuble hinted on Saturday that Berlin was preparing for a possible Greek default.
Around half of investors expect Greece to leave the euro zone within the next 12 months, a survey by German research group Sentix showed on Tuesday.
Cyprus, however, is winning investors’ confidence and praise for how it has dealt with its problems. Standard & Poor’s revised the outlook of the island’s B+ credit rating to positive last month, while Fitch affirmed its rating on Friday.
Other Cyprus bondholders include BlackRock, Wellington Management Co and Russell Investment, according to Thomson Reuters data service eMAXX.
Banks in Cyprus, a former British colony, have severed their links to Athens.
Like their Greek peers, Cypriot bonds are not eligible for the European Central Bank’s quantitative easing programme, in which it and national central banks will buy euro zone government debt worth one trillion euros to stimulate the bloc’s economy.
But if an upcoming EU/IMF review of Nicosia’s bailout deal is positive – and hopes are high after the island passed an insolvency law – that could change.
With 2020 yields at 3.5% – slightly higher on the day – Cypriot bonds could become the highest-yielding euro zone debt to receive direct ECB support.
The yield has fallen about one percentage point in the past two weeks after the adoption of the insolvency law. It traded above 14% two years ago.