articles | 08 March 2016

ECB: Cyprus could be excluded from sovereign bond purchases

Cyprus might soon be excluded from the European Central Bank’s bond-buying programme because its credit rating is below investment grade and it is likely to exit its bailout programme at the end of March 2016, an ECB spokesman said recently.

Cyprus is expected to conclude its bailout programme without maintaining a precautionary credit line, because it can funditself after three years of financial aid and reforms, Cypriot and European officials said earlier.

The ECB had waived the minimum credit rating requirement for Cyprus, but the waiver was conditional on the country’s being in a programme.

So the end of the bailout may mean that the ECB would have to stop buying Cypriot government debt in its €1.5 trillion quantitative easing scheme.

“Lifting of the waiver/loss of the eligibility for the Public Sector Purchase Programme are a consequence of collateral rules and the end of the programme,” an ECB spokesman told Reuters.

However, a source familiar with the situation said the consequence of falling out of QE should be limited for the country’s banks, since they have improved their funding positions in recent quarters.

Analysts said Cyprus could be a test case for much bigger Portugal, which has just one investment grade rating left, putting the country at risk of dropping out of QE in case of a downgrade.

“Were DBRS to downgrade its Portuguese rating when it is next scheduled to review it on 29 April, Portugal’s bonds could become ineligible under the current rules,” UBS said in a note to clients.

“We will be watching developments around purchases of Cyprus for clues on what might happen to purchases in the – much larger – Portuguese bond market if DBRS decides to downgrade Portugal,” it added.

The ECB did not buy any Cypriot bonds in February and so far has purchased just €285 million worth of the country’s sovereign debt, compared with €140 billion worth of German bonds.

The ECB Governing Council could still come up with a new waiver for Cyprus, but its past behaviour on collateral waivers for other countries exiting bailouts suggests that it is unlikely to do so.

Cypriot Finance Minister Harris Georgiades said he expected a continuation of policies that have eliminated the public deficit would ensure further upgrades by credit rating agencies. That in turn would bring down state borrowing costs, currently just over 4%.

“We need investment-grade (ratings),” he said.

The country’s best rating, a BB- from S&P, is still three notches below investment grade.

Source: Cyprus Mail

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