EU denies talks on Cyprus bailout

THERE are no talks under way to draft an aid plan for Cyprus, the European Commission has said.

“The Cyprus economy is fundamentally healthy. Certain decisions need to be taken about reforms… (but) there is no aid plan being discussed at any level,” spokeswoman Chantal Hughes said yesterday.

Ratings agency Fitch downgraded Cyprus’ credit rating on Wednesday, saying the island was headed for a European Union bailout despite planned tax hikes and spending cuts to tame a runaway deficit.

Meanwhile, Cyprus government bonds used as collateral in the European Central Bank’s refinancing operations will be given an extra 5% discount after Fitch downgraded its rating. Fitch cut Cyprus’ credit rating to BBB, saying the island state was likely to require a bailout to meet its funding needs.

& The ECB accepts government bonds as collateral at market value minus a discount, of between 0.5% and 8.5%, as long as at least one credit rating agency rates the country at A- or better.

When the best rating is lower than that, the ECB charges an additional haircut of 5%. Greek and Portuguese government bonds are also subject to the same discount, but Ireland escapes this as the agency DBRS, rates it A.