AS BAILOUT talks with international lenders dragged on, the government yesterday sought to downplay speculation that the state would soon be unable to meet its financial obligations.
“We have ways to ensure that the state continues making payments,” said government spokesman Stefanos Stefanou, responding to reporters’ questions on whether the state could run out of cash next month.
Commenting on the overall progress of negotiations with the troika mission here on the island, Stefanou said a great deal of ground has been covered.
But there are many “difficult issues pending,” he added.
Once negotiations wrapped up, the President would brief political parties and the social partners, Stefanou said.
From media reports, it can be gleaned that a major sticking point is the bailout figure for the island’s two largest lenders, Popular and Bank of Cyprus.
In addition to being a key component of an overall rescue package, the scope of the banks’ recapitalisation needs – once agreed – would impact other areas of discussion.
If it turns out the banks need over €10 billion – according to some estimates – that could put added pressure on the government to sell off state assets, such as semi-governmental organisations, to pay off an EU/IMF loan.
The privatisation of SGOs, particularly those which turn a profit, is a ‘red flag’ for the Christofias administration.
Weighing in yesterday, leaders of the Cyprus Ports Authority and the Cyprus Telecommunications Authority both rejected outright privatisation.
Stathis Kittis, chairman of CYTA’s board of directors, left a window open for gradual and partial privatisation in tandem with a “controlled” issue of shares, but cautioned that this should be done “carefully.”
Also yesterday troika experts saw representatives of the investment company Pimco – which is running diagnostics on the Cypriot banking sector.
The troika experts were said to be combing the books of co-operative banks, and are proposing a drastic reduction in the number of these banks from 97 to 35 through mergers.
Cypriot authorities have apparently agreed to the restructuring of the co-operatives that would include early retirement schemes and a hiring freeze.
The co-operatives’ exposure to government bonds is estimated to be around €1.4 billion. Given that the value of the bonds has dropped by 40 to 50 per cent, that would translate into losses of at least €550 million.
Meanwhile online media yesterday cited a new report by Merill Lynch warning that Cyprus could turn into the next weak link for the eurozone in 2013.
Merill Lynch said that despite the small size of the Cyprus economy – accounting for just 0.15 per cent the eurozone’s GDP - Cyprus’ debt dynamics could be at risk as the reported amount that Cyprus needs keeps rising.
“The broader implications of these challenges would eventually accelerate the speculations that Cyprus, and not Greece, may be the first country to exit the eurozone as soon as markets realise the risks to the country debt dynamics,” it said.
That could even create a situation where "Cyprus could in theory default on its official debt and remain in the eurozone, as its primary deficit is very small," Merill Lynch reported.
It pointed out that concerns over the viability of Cyprus’ national debt could be somewhat offset by expected revenues of between €1.7 billion to €2.4 billion a year from the commercial exploitation of natural gas reserves.
But given that it could take a decade for the cash to flow, this prospect might not be enough to ease jittery markets and official creditors of Cyprus, the report said.
Citing the same report, web-based Stockwatch said Merill Lynch does not expect a deal between Cyprus and international lenders before general elections in February 2013.
members of the troika delegation were on the island still yestreday