Cyprus is showing signs of stress. Credit ratings, yields, the banking sector and sentiment are all signalling distress. This tiny island economy, roughly a tenth the size of Portugal, might defy the PIIGS acronym by needing help sooner than its eurozone peers Spain or Italy.
Redrawing the sovereign ratings map clearly showed what the ratings agencies thought. See the blue circle on the map, right. This heatmap colours countries that have been heavily downgraded since the start of the year more red, and those that have been more heavily upgraded, green. Spain and Ireland are reddish. But Cyprus is clearly in the Portugal-and-Greece camp of dark red (high downgrades).
Next, yields. Bond yields are the cost of debt to the government, so rising yields are bad news. And they are certainly rising in Cyprus. Compare two auctions of six-month debt, one in January and the other in March. Yields rose from 2.02 per cent to 2.74 per cent in those two months. This level is higher than yields on the last two-year debt offering in January of 2010. Read more
Economic sentiment in Cyprus fell sharply in the month to March, helping the small eurozone nation to keep its unenviable position of second-from-last in the sentiment stakes. (Last is Greece.)
The banking sector probably isn’t helping. In a report last week, ratings agency Moody’s estimated that about €2.7bn would be needed to recapitalise the banks if assumptions made in stress tests materialised. Compare that to the €500m fund announced on Monday by Cyprus bank governor Athanasios Orphanides and your economic sentiment might dip a little, too. Read more
Europe’s new system of financial supervision maybe taking shape, but there are still gaping holes – and it is distinctly possible that policymakers will stumble into them. That was the, rather sobering, message of Athanasios Orphanides, Cyprus’s central bank governor, in a speech just delivered in Bratislava.
It is worth paying attention to what he had to say. Mr Orphanides, who learnt the ropes of central banking at the US Federal Reserve, is one of the smarter economists on the European Central Bank’s 22-strong governing council. That gives him greater status than perhaps a central banker from a Mediterranean island would usually command.
The European Union is close to an agreement on setting up new pan-European regulatory authorities and a “systemic risk” council headed by the ECB’s president. But Mr Orphanides suggested the emphasis had been put on preventive measures – and not enough on how to clear up the mess when financial institutions run into trouble. Read more