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Don’t Panicos

18 May 2012 By George Hay

Is nomen omen? Last month Cyprus appointed an economist called Panicos Demetriades as central bank governor. On Friday, the euro zone minnow committed to pump 1.8 billion euros, or 10 percent of GDP, into Cyprus Popular Bank (CPB) if its second largest lender can’t raise it privately. What’s more, this may just be a holding operation. If Greece quits the euro, Cypriot banks and the state itself will need more help.

CPB’s immediate capital deficit stems from the stress test conducted last December by the European Banking Authority, which left it needing to find 2 billion euros by the end of June. Given that its market capitalisation is now only 211 million euros, don’t count on shareholders lending a hand.

The good news for Cyprus is that CPB’s slightly larger peer Bank of Cyprus is only 200 million euros away from hitting its own 1.6 billion euro EBA target, following a rights issue. The bad news is that just sorting out CPB alone will put a serious dent in the country’s finances. If all 1.8 billion euros is used, the state’s debt would rise from 72 percent of GDP to 82 percent.

And looming over everything is what’s happening in Greece. Bank of Cyprus and CPB each have about 10 billion euros of Greek loans, of which already 13 percent and 19 percent respectively are non-performing. In the event of a Greek exit from the euro, they would both need further capital. Although the central bank’s data from the end of March doesn’t show any deposit flight, the lenders might also require help on liquidity.

Even without a Greek exit, the government’s finances are stretched. Last year it had a 6.3 percent budget deficit and received a 2.5 billion euro loan from Russia, with which it has close financial ties. The IMF thinks the economy will shrink 1 percent this year. In the long run, offshore oil deposits may provide some salvation. But if Athens brings back the drachma, Nicosia will be hard-pressed to avoid its own bailout from the euro zone.

 

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