articles | 09 January 2013

Race to minimise worst-case debt scenario

Cyprus is trying to avert adoption of the worst-case scenario concerning the amount needed for bank recapitalisation, which would make the island’s debt unsustainable and lead to additional austerity measures, including privatisation of public companies.

The matter was discussed behind closed doors by the House Finance Committee while the Central Bank has hired investment management corporation BlackRock to help it convince lenders to adopt the baseline scenario, which reportedly calls for €7.0 billion instead of the worst-case €10 billion.

lackRock was selected due to its experience with neighbouring Greece, where it carried out the due diligence for the banks.

A relevant clause in a bailout memorandum agreed on principle between Cyprus and international lenders says that a “bank support facility of up to EUR [10] billion is foreseen under the programme, which will also cover potential future capital needs, determined on the basis of a top-down capital exercise, as well as potential resolution costs. The exact amount per bank will be determined in the due diligence exercise.”

The time horizon of the bottom-up valuation is three years – mid 2012 to mid 2015.

A meeting between party representatives, the finance minister and the Central Bank governor was also scheduled for 8pm last night to discuss ways of achieving this ahead of a eurogroup meeting on January 21.

Pimco, the company doing the due diligence on the banks portfolios is scheduled to release its final report on January 15.

“The aim of tonight’s (last night’s) meeting is the exchange of views in relation with the assumptions, the forecasts and the scenarios, which define the amount,” committee chairman Nicolas Papadopoulos said. “Small amendments to these rates can potentially bring about changes worth billions.”

The assumptions used by Pimco include growth, unemployment, property prices and ability to repay loans, Papadopoulos said.

The DIKO vice chairman said bank needs on September 30, 2012 did not exceed €4.0 billion “but something came up inside of three months.”

The committee heard that international lenders imposed extreme scenarios on Cyprus to ensure the viability of the banking system should such an event materialise.

“We have assurances that efforts are underway to select the baseline and not the extreme scenario so that we all achieve our objective for a sustainable debt,” AKEL parliamentary spokesman Stavros Evagorou said.

Source: Cyprus Mail

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