articles | 13 April 2020

Cyprus will have to raise its own funds to cover economic measures

Cyprus would have to rely on itself for raising funds for its economic measures as the Eurogroup meeting that concluded on Thursday night decided to put off any decision on the issuing of Eurobonds, now also known as corona bonds.

As was expected, northern European countries opposed the idea of pooling EU debt, which was the demand of Italy and Spain, but the Eurogroup approved a €540 billion package of measures aimed at protecting the bloc’s economy, which is expected to contract by as much as 10% because of the coronavirus.

Speaking on Friday morning on state broadcaster CyBC, Finance Minister Constantinos Petrides said that while the measures were helpful, the decision meant that “each country must go its own way,” as the funds made available were not enough to finance the measures for protecting jobs and keeping businesses afloat.

This vindicated the government’s decision to raise €1.75 billion in the markets this week, through the issue of seven-year and 30-year bonds. “If we had not acted immediately, we would have jeopardised our liquidity,” Petrides said regarding the bond issue.

Of the €200 billion fund set up by the European Investment Bank for cash-strapped companies in the bloc, Cyprus was eligible to a €400m loan while it would also be able to draw €160m from the European Commission’s €100 billion jobless reinsurance plan for the labour ministry’s schemes to protect workers. An additional €70m would come from readjustments to state contributions to the EU budget, Petrides said.

The opening of €240 billion in credit lines involved the financial instrument of low interest bank loans, guaranteed by the state, to companies. The Cyprus government has a plan for state guaranteed bank loans of up to €2.6 billion, but the measure is opposed by the political parties, that insist the state should lend the money to businesses directly rather than through the banks.

Petrides repeated that the state did not have the liquidity to undertake such an initiative in contrast to the banks, that did. “The liquidity in the banking sector should be used to support businesses,” he said, explaining that the interest would be low, between 0.75 and 1.5%; the repayment period would be between three and six years. The maximum amount a company would be able to borrow was either 25% of its annual turnover or double its monthly payroll.

Opposition parties had claimed the scheme would benefit the banks, ignoring the fact that the banks would be left with a loss if loans were not repaid, because the state was only guaranteeing 70% of each loan. “In other countries the cost to the bank of state guaranteed loans, was between 10 and 20%,” Petrides said. In Cyprus the banks are taking a bigger risk, despite the claims of the opposition parties.

Source: Cyprus Mail

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