FRANKFURT (MNI) – Cypriot government bonds can no longer be used as
collateral in European Central Bank liquidity operations, the ECB said
Tuesday, after Cyprus’ recent downgrade to junk status by all major
rating agencies.

“The downgrade of Cyprus below the minimum credit threshold…
means that Cypriot government securities no longer fulfill the
creditworthiness requirement,” the ECB said in a statement.

As a result, “Cypriot government securities cannot be used as
collateral in Eurosystem monetary policy operations and counterparties
making use of those securities will have to replace them with eligible
collateral or, alternatively, get recourse to the liquidity provided by
national central banks” through emergency liquidity assistance.

Cyprus on Monday formally requested aid from the European Financial
Stability Facility. The amount of aid needed has not been given, though
media reports have put the request at no more than E10 billion.

A spokeswoman for the International Monetary Fund said that the IMF
has not received a similar request from Cyprus.

The Central Bank of Cyprus earlier Tuesday said it supports the
government’s decision to seek aid. The move “was triggered by the need
to recapitalise those Cypriot banks that have not been able to secure
sufficient private capital” to meet the requirements of the European
Banking Authority, the country’s central bank said.

“In these challenging economic times, in which pressures on public
finances are already considerable, it is vital to restore the banking
system’s ability to promote economic growth as soon as possible,” the
the bank added.

The funds are necessary also “to contain possible future contagion”
from Cyprus’ banks to other countries, the Cypriot central bank said.
EFSF aid “will help to ensure that these objectives are achieved in a
timely and orderly fashion, while safeguarding the stability of our
financial system and the economy as a whole,” it said.

Eurogroup President Jean-Claude Juncker Monday welcomed Cyprus’
request and said the conditions for European financing would be
negotiated with the European Commission, in liaison with the ECB.

The loan conditions “will include measures that will address the
main challenges of the Cyprus’ economy, primarily those of the financial
sector, and I expect that Cyprus will engage with strong determination
in the required policy actions,” Juncker said.

— Frankfurt bureau: +49 69 720 142; email: ccermak@marketnews.com

[TOPICS: M$$EC$,M$X$$$,MGX$$$,M$Y$$$,M$$CR$,MT$$$$]