Cyprus could be dropped from bond buys: ECB

The Pak Banker - - FRONT PAGE -

FRANK­FURT: 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, an ECB spokesman said to­day. Cyprus is ex­pected to con­clude its bailout pro­gramme with­out main­tain­ing a pre­cau­tion­ary credit line, be­cause it can fund it­self 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-euro 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 me­dia. 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 euros worth of the coun­try's sov­er­eign debt, com­pared with 140 bil­lion euros 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.

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