Haircut on Cyprus Bonds? Report

Fears are rising that Cyprus may write down its sovereign debt by 50 percent in a 'haircut' similar to Greece's, according to a report on Bankingnews.gr (in Greek).

If that happens, the island's major lenders will be in a much worse position than before. Cyprus and Greece are so intricately interlinked via their financial sectors that 'contagion' from Greece's own debt haircut has resulted in billion-euro losses in banks like Laiki and Bank of Cyprus, both of which have been bailed out by the government.

But when Greece agreed to a private sector 'haircut' back in February, the EU Commission said it was unprecedented and would not be applied to any other member state. Still, there are reports emerging from the investment community that Laiki has stopped paying interest on its bonds (debentures) and is in the process of informing investors of their alternatives, one of which is to agree to swap the bonds for shares.

Meanwhile, the government has appealed to the IMF for its own rescue funds. IMF head Christine Lagarde said: "We have a team on the ground, I would not want to prejudge their findings, it's always the case that when a member of the IMF needs help we roll up our sleeves in and help in record time,"

The Troika arrived on the island yesterday and its members have been meeting with finance minister Vassos Shiarly, representatives from the insurance sector, and the Central Bank. The IMF's specialists are researching the public and financial sectors' positions with a view to reaching a bailout figure that will save the island from near-bankruptcies and financial collapse.

Any bailout from the European Financial Stability Fund (EFSF) would be conditional on cutbacks and efficiencies in the financial sector, as well as continued fiscal consolidation in the public sector, said the Eurogroup.

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