Cyprus: No need to default.

Cyprus: No need to default.
15 January 2013
Gas reserves will eventually trump bank debt
This material should be regarded
as a marketing communication
and may have been produced in
conjunction with the RBS trading
desks that trade as principal in
the instruments mentioned herein.
• Cyprus will be the single largest Eurozone bailout deal relative to size of
its economy at near 100%/GDP. Cyprus is about to absorb a level of banking
risk on the sovereign balance sheet that would put it in the same league as
Ireland. Debt/GDP will climb to over 140%/GDP, well above the IMF's
benchmark for debt sustainability, and second in the Euro area only to Greece.
• We do not however expect Cypriot PSI. In fact Cyprus is poised, in time, to
become the strongest government credit in EMU owing to its huge natural gas
reserves worth a minimum of 200%/GDP. If further excavations match the
success of the first findings, these could top €530bn (2950%/GDP). Assuming
a 20% profit margin on these, the value to Cyprus exceeds 580%/GDP.
• Cyprus will become geopolitically important for gas pipeline routes and
Europe should benefit from greater energy security away from Russia. These
monies however are not readily available; the commodity spoils of Europe’s
new lucky country are a medium- to long-term story.
•
•
Factors assisting the transition to the medium term and mitigate PSI-risk are:
(1) a core EMU political commitment that PSI was a one-off for Greece,
(2) unwillingness to touch PSI ahead of the German elections,
(3) large domestic bank ownership of debt, which mitigates the value of PSI
(4) the likely new President will be more reformist and privatise firms
(5) many bonds are in English Law (unlike in Greece), and critically
(6) the budget is not in a shocking state: 2013 primary deficit likely sub-1%.
Flexibility on the banking sector recapitalisations are probable to meet
debt sustainability criteria and avoid PSI.
• The risks are around the banking sector’s exposures. Short-run a much
more astronomical banking sector requirement than €10bn is highly unlikely
given that PIMCO, Blackrock and the IMF are combing the data. PSI risk would
be driven by political accidents. Beyond this Greek exit remains the key risk.
• Current delays and rhetoric both in Germany and in Cyprus are largely
for electoral reasons. Germany’s refusal to rule out haircut is to ensure both
that privatisations are part of the deal, and to secure greater austerity and
oversight of the Cypriot banking system. A new Cypriot President will likely
acquiesce to privatisations as the cost of ensuring debt sustainability.
• Newsflow on the bailout will make for easy headlines in comparing Cyprus to
Greece, but the endgame we believe will be far friendlier to bondholders, aided
by political calendars and the huge upcoming resource bounty.
Contacts:
Michael Michaelides
Rates Strategist
+44 207 085 1806
[email protected]
Harvinder Sian
European Rates Strategist
+44 20 7085 6539
[email protected]
www.rbs.com/gbm
Cyprus: No need to default.
Summary
Cyprus should complete its bailout deal after the February Presidential
elections. The elections pave the way for a more Euro friendly, reformist government.
The MoU will however deliver Cyprus a classic debt overhang problem, as the
sovereign will absorb all the banking risk. Debt/GDP will ultimately surpass 140%.
Does this mean PSI? We do not think so. For one, Europe wants to avoid PSI in
other countries so political efforts will be made to ensure debt is deemed sustainable,
most likely through flexibility on the banking numbers. Meanwhile, a new reformminded Cypriot President after the February elections will likely agree to the Troika’s
privatisations demands. Avoiding a haircut is a ‘win-win’ for Cyprus and core Europe.
Europe's intention to treat Greek PSI as a one-off is valid, so long as the
economics make sense. It is here that Cyprus is a special case. It has huge gas
reserves, worth at least 3x and feasibly 29x GDP. These are not yet exploitable but
loans to Cyprus can be money good absent a political accident.
Cyprus’ Financial Assistance Package
How much is needed?
Cyprus will require loans of
as much as 100%/GDP
Cypriot banks suffered major
losses in the Greek PSI
(over €4bn or 20% GDP)
The results of the PIMCO bank
stress test study are due on
Friday 18 January
We ultimately do expect some
flexibility to remain in the bank
recapitalisation
Cyprus will require financial assistance of potentially €17bn-17.5bn, almost
100%/GDP. Cyprus has already agreed a MoU with the Troika in December and a final
deal will be signed post-election. The Republic requires €7.5bn for the public finances
(€6bn to rollover maturing debt and €1.5bn in deficit funding), whilst the final figure for
the recapitalisation of the banking sector has yet to be resolved.
The Cypriot banking system suffered major losses in the Greek PSI (more than €4bn,
exceeding 20% GDP) and its two major banks continue to have significant loan
portfolios (135%/GDP) in Greece. The preliminary memorandum outlines up to €10bn
for potential bank needs and the final figure is contingent on a stress test of the Cypriot
banking system. The results of the PIMCO bank stress test study are due on Friday
18 January. Press reports indicate this final amount from PIMCO will be close to
€10bn, and this will likely be used as the basis for negotiation of the final bailout deal.
There are reported disputes on the methodology used for the bank stress test between
members of the Steering Committee overseeing the PIMCO review. The Steering
Committee is composed of the Cypriot authorities, the ECB, EBA, ESM, European
Commission and the IMF (as an observer). Indeed, Blackrock Solutions has been
appointed to review the assumptions and methodology of the PIMCO study at the
request of the Cypriot Central Bank.
The €10bn for the banking sector would increase debt by 55%/GDP 1, more than any
other developed market banking crisis bar Ireland (73%/GDP). Nonetheless, we
ultimately do expect some flexibility will likely remain in the package, possibly
with regards the timing and level of capital ratios required, if this is necessary to
ensure Cyprus’ debt sustainability (probably after privatisations) and avoid PSI.
Costliest Banking Crises since 1970: Addition to Debt Stock (%/GDP)
Source: IMF, RBS
120%
108%
103%
88%
100%
83%
82%
80%
73%
72%
68%
65%
63%
Tanz.
(1987)
Nigeria
(1991)
Cyprus
(2013)
60%
40%
20%
0%
Gineau
(1995)
Congo
(1992)
Chile
(1981)
Uruguay
(1981)
Ireland
(2008)
Iceland Indones.
(2008)
(1997)
1
Page 2/10
Cyprus: No need to default.
Debt Sustainability and Privatisations
• Debt/GDP in Cyprus at year end is projected at 85.8%/GDP according to the
Cyprus’ Budget Balance
(%/GDP)
2
government’s 2013 budget. With €11.5bn of additional debt from the
bailout, this means debt could peak at above 140% in 2014, after which
debt/GDP is expected to decline to near 100% by 2020 3.
Source: Eurostat, RBS
2011
• This is higher than the debt/GDP peak envisaged by the Troika in Portugal
-6.3%
(124%) and Ireland (122%), and even above the IMF forecast for Italy (128%).
-5.3%
2010
• Nonetheless, the public finances remain in relatively good shape; the problem
2009
0.9%
2008
3.5%
2007
Memorandum Targets for Cyprus
-1.2%
2006
-2.4%
2005
-4.1%
2004
2003
is primarily the banks. The forecast primary deficit in Cyprus is less than 1% for
2013 and is expected to be in primary surplus from 2014; reaching 4% in 2016.
Debt sustainability is at risk because of the jump in the debt stock caused by
injecting money into the banking sector.
-6.1%
Primary Balance Targets (% GDP)
Fiscal Consolidation (%/GDP)
2013
-0.7%
3.0*%
2014
+1.0%
1.75%
2015
+2.7%
1.5%
2016
+4.0%
1.0%
-6.6%
2002
-4.4%
2001
-2.2%
2000
-2.3%
-10%
-5%
Source: IMF, RBS (*including 0.25%/GDP of measures already taken in late 2012)
• Out of the total fiscal adjustment of 7¼ %/GDP of adjustment, 5½%/GDP
has already been incorporated in the MoU and all agreed provisions have
already been passed in Cyprus’ Parliament, even including measures
beginning in future years.
0%
5%
• The Memorandum signed by Cyprus and the Troika reads that “if necessary
to restore debt sustainability, the Cyprus authorities will consider a
privatisation programme for state-owned and semi-public companies.”
• However, current Cypriot President Dimitris Christophias has rejected
privatisations on principle and had strongly resisted them during the drawn-out
bailout talks over Cyprus. The current government in Cyprus claims debt is
sustainable even without privatisations.
• There are Presidential elections in Cyprus in February, in which Mr
Christophias is not standing and the Communist party candidate is highly
unlikely to win (see the more detailed section below).
• Opposition to the current bailout deal for Cyprus emanating from the SPD in
Germany is primarily for political reasons in our eyes, aiming to expose
Merkel’s reliance on the SPD to pass key legislative votes on Euro crisis policy.
• Meanwhile, the German Chancellor’s comments that there can be “no special
treatment for Cyprus” and that there are “common rules for Europe” imply that
privatisations will be a prerequisite of any deal.
• Merkel’s comments that bailout talks are “by far not over yet” strongly resonate
with the desire for further conditions/concessions in any deal with Cyprus.
• We believe that the final deal will be agreed in March. Delaying will ensure the
final details are agreed with the new President. This will most likely be Ms
Merkel’s favoured candidate Mr Anastasiadis. It will also allow maximum
pressure to be exerted on Cyprus in the meantime.
2
3
including funds to refinance via unfunded government bonds disbursed to recapitalise banks.
according to the Cypriot government.
Page 3/10
Cyprus: No need to default.
PSI risks and divisions in the Troika
• Press reports have suggested that the IMF is pushing for a direct
Cyprus’ Credit Ratings
S&P
Moody’s
Fitch
CCC+ neg
Caa3 neg
BB neg-
recapitalisation of Cypriot banks by the ESM, as envisaged in the spirit of the
June 2012 EU Leaders’ Summit (even if at the later date). If the recapitalisation
of the Cypriot banking sector did not fall exclusively on the sovereign balance
sheet, Cypriot debt would be far lower and sustainable. This would in turn also
protect any IMF loan, as IMF lends only for budget requirements and not for
banking sector requirements.
Source: Bloomberg, RBS, (neg= negative outlook)
• Germany, the Netherlands and Finland, which have subsequently declared
their opposition to direct ESM bank recapitalisation for ‘legacy assets’. This
issue is due to be resolved in the first semester of 2013.
• Alternatively, other press reports suggest the IMF has considered a partial
default to ensure lower debt levels in Cyprus before any bailout funds are
disbursed. This would protect official creditors from the probable rise in the
debt/GDP once frontloaded austerity measures as part of the MoU are
implemented. The rating agencies have downgraded Cyprus on this concern.
“We didn’t say all Greek-speaking
countries, we said Greece.
It is part of the credibility to stick to the
signals you have sent”
Jean Claude Junker (speaking to
German radio Deutschlandfunk)
• The Cypriot Finance Minister has claimed that PSI has never been raised in the
negotiations 4. Olli Rehn and Jean Claude Junker have both stated that a
haircut will be avoided. The German government has refused to rule out a
haircut, though we consider this an exertion of pressure than a policy position.
• The Cypriot Central Bank has received a letter from the IMF, which notes that
the main criterion on debt sustainability is the ‘ability to make debt repayments’
rather than an arbitrary level of debt/GDP
• We think a final bailout deal will be signed, including privatisations.
• Our interpretation of the delay and the political noise from Germany is
not that there will be a haircut, but instead that this is a means of
increasing pressure to ensure that privatisations are part of the deal, as
well as securing greater transparency/oversight of the Cypriot banking system.
• We do not expect PSI in Cyprus. IMF involvement is a prerequisite for
Germany and a number of other core countries. The German government
spokesperson has refused to rule out PSI, however we consider that Germany
will reject any deal with PSI given:
(1) PSI would shatter the credibility of the post-Greek PSI pledge that
Greece was a “unique” case. Eurogroup chief Mr Juncker and
Commissioner Rehn have both strongly argued this point.
(2) Ms Merkel has no incentive to rock the boat ahead of the German
Federal election, given the current relatively benign OMT-induced
environment in sovereign bond markets. Indeed a Cypriot PSI is unlikely on
moral hazard grounds as it would probably bring Cyprus’ debt/GDP below
the levels of Ireland and Portugal.
(3)There is near unanimous pro-reform political consensus in Cyprus
(4) A large share of the debt is under English law, making PSI legally
more difficult (debt under the EMTN programme). Collective Action Clauses
in this debt mean a 25% share of bondholders can block a restructuring
deal agreed with a subset of creditors then being imposed on all bondholders.
(5) The high share of domestic debt ownership (55%) implies PSI would
necessitate further bank recapitalisation, whilst Cyprus primary deficit
in 2013 will be below 1%/GDP
(6) Significant gas reserves available means given the maturity of
EFSF loans, there is no doubt the loans are money-good (see below)
4
http://www.cyprus-mail.com/cyprus/shiarly-no-issue-haircut/20121221
Page 4/10
Cyprus: No need to default.
Cypriot Public Debt Ownership
Source: Cypriot Finance Ministry, RBS (Note: Prior to Cypriot bank recapitalisation bond)
Foreign Creditors
45%
Domestic Banks
48%
Domestic
Ins/Pension Funds
4%
Other Domestics
3%
The role of Russia as a potential facilitator
• Russia is heavily involved in the Cypriot bailout. Russia loaned Cyprus €2.5bn
in October 2011 as Cyprus (with the experience of Greece in mind) avoided
applying to the EFSF after losing market access in 2010.
• The maturity of this loan was initially four to five years; however Cyprus has
requested a five-year extension to 2021 with a 2 year grace period (i.e. capital
repayments to begin in 2018). This is currently under consideration by Russia 5.
Cyprus’ Debt Redemptions
Source: Bloomberg, RBS
3,500
3,061
3,000
EUR bn
2,500
2,292
2,000
1,469
1,500
1,154
900
1,000
287
500
20
11
2018
2019
0
2013
Bonds
2014
Russian Loan
2015
2016
2017
2020
2021
Proposed Russian Loan Extension
• The current Cypriot government had sought a second loan from Russia;
however Russia was only willing to participate alongside any EFSF/ESM aid.
However, Russian Prime Minister Vladimir Putin has made clear Russia has
not ruled out joining a deal alongside the ESM/EFSF.
• The role of Russian depositors in the Cypriot banking system is controversial in
Germany- with political and press allegations about supposed money
laundering within the Cypriot banking system. Cyprus is in full compliance with
EU and International money laundering laws but any deal is likely to press for
greater European oversight on Cypriot banks to allay political criticism.
5
http://www.cyprus-mail.com/25-billion-euros/more-lenient-terms-russian-loan-possible/20130112
Page 5/10
Cyprus: No need to default.
Long-term prospects for Cyprus are much better
The medium and long-term prospects for Cyprus are better than the debt stock infers
for a numbers of reasons:
(1) Political developments. Presidential elections in February look likely to deliver a
new President more willing to undertake privatisations. The Presidential frontrunner is
openly backed by Ms Merkel and is committed to implementing the Memorandum.
(2) Potential direct ESM recapitalisation in line with the spirit of the June Summit
agreement would be hugely beneficial for Cyprus given the scale of its bank needs.
Full retrospective ESM recap now seems unlikely given the ‘legacy asset’ debate but
any compromise deal for retrospective bank recapitalisation of viable banks would
have very strong positive read-across for Cyprus (as in Ireland).
(3) Most importantly… Cyprus has very substantial gas reserves. The value of
these reserves makes bailout repayments pale in comparison, even if the gas reserves
remain at the early stages of development.
(1) Politics:
Pro-reform agenda across the political spectrum
Remaining Presidential Debates:
Date
Topic
28 January
Cyprus Problem
11 February
Domestic Affairs
& Economy
Source: RBS
Crucially across the political spectrum, there is little anti-Euro sentiment amongst
Cypriot politicians. Despite the wide spectrum of views on the Cypriot politics,
maintaining Euro membership and Cyprus’ place in the EU have unanimous political
support. The 2013 Budget and the reforms stipulated in the December MoU were
passed almost unanimously by the Cypriot parliament (51 in favour/2 against).
Current President Christophias (of the Communist AKEL party) initially looked to
Russia for aid, given the party’s close ties to the unions and given the catastrophic
impact on the Greek economy of the Troika reforms. He has also subsequently
resisted privatisations. In any case, he is coming to the end of his five-year term and is
not standing for re-election.
Nonetheless, even his AKEL party supported the passage of reforms in the MoU and
in any case is a minority in parliament. There are only Presidential elections in
February; the next legislative elections are not due until 2016.
Cyprus’ House of Representatives
Cypriot Parliamentary Election Results 2011
Source: Government of Cyprus, RBS
Source: Government of Cyprus, RBS
European
Party, 2
Green, 1
2%
4% 2%
EDEK
9%
EDEK, 5
DISY (Centre-right)
DISY
(Centre-right)
34%
DIKO (Centrist)
EDEK (Socialist)
DISY, 20
DIKO, 9
AKEL (Communist)
DIKO
(Centrist)
16%
European Party (Right-wing)
Greens
Others
AKEL, 19
AKEL
(Communist)
32.7%
Page 6/10
Cyprus: No need to default.
Presidential Elections
Presidential elections are scheduled for 17 February, with a run-off if no candidate
secures 50% of votes. Any run-off is scheduled for the following Sunday (24 February).
There are three candidates:
(a) Nikos Anastasiadis is the frontrunner, who has secured support from across
the political spectrum. He is leader of the centre-right DISY party but is also
supported by the centrist DIKO, right-wing European party, and the Greens.
(b) Stavros Malas is the Communist (AKEL) party candidate and health minister
under the current government.
(c) Georgios Lilikas is an independent candidate, backed by Socialist party
EDEK. He was foreign minister under the previous Presidency.
Polls show Nikos Anastasiadis to be far in the lead but a run-off remains likely. The
latter two candidates are effectively battling to get into the second round. Polls suggest
both would be defeated in any case.
Cypriot Presidential Elections Polling
Run-off #1: Anastasiadis vs. Malas
Runoff #2: Anastasiadis vs. Lilikas
Source: Fileleutheros, RBS
Source: Fileleutheros, RBS, (*Abstain/Spoil ballot)
Source: Fileleutheros, RBS, (*Abstain/Spoil ballot)
50
40.3
Don’t'
know,
4%
40
20.5 17.9
20
Anast.,
46%
Anast.,
50%
5.8
Won't vote
Others
Lillikas
Malas
Anast.
0
%
Won't
vote*,
17%
15
6.1
10
Don't know
30
Don’t'
know,
7%
Won't
vote*,
18%
Malas,
28%
Lillikas,
30%
Anastasiadis is the strong favourite and polls indicate the economy is the most
important factor in the election. Nonetheless, should independent candidate Georgios
Lilikas get into the final round, Communist AKEL would likely throw their support
behind him. This could make the run-off closer, particularly since many supporters of
the centrist DIKO party will vote Lilikas despite the party line (he was former foreign
minister in the previous DIKO-led government). The frontrunner Nikos Anastasiadis is
considered weak on foreign policy grounds (notably on the Cyprus problem) having
supported the 2004 re-unification plan rejected by 74% of Cypriots in the Anan-plan
referendum. This could make an Anastasiadis/Lillikas run-off closer. Anything but an
Anastasiadis victory however will be a major surprise.
(2) ESM Bank Recap and Legacy assets
As in the case of Ireland, direct ESM bank recapitalisation would strongly benefit
Cyprus’ debt sustainability. Indeed, if the spirit of the June Summit agreement were
honoured, debt sustainability would not even be in question. Nonetheless, the current
bailout envisages all bank-bailout costs falling onto the sovereign balance sheet. The
issue of legacy assets is due to be resolved in the first semester of 2013.
Full removal of bank bailouts from debt numbers is unlikely- however any ‘legacy
asset’ relief agreed as a compromise at the Eurozone level will be of significant benefit
for Cyprus given the massive share of its bailout composed of banking sector needs.
Nonetheless, the risk here is that Ireland’s debt sustainability is aided via a refinancing
of the promissory notes (which would not provide headline debt relief but would ease
refinancing needs). This is likely more attractive for the core as it could reward Ireland
but not have any read through for other peripheral countries.
Page 7/10
Cyprus: No need to default.
(3) Cypriot Gas Reserves are enormous and will
turn Cyprus into a net international creditor
Cyprus Natural Gas Timeline
Date
Event
Feb
Cyprus and Egypt sign
2003
Agreement on Delineation
of EEZ.
Jan
2007
Cyprus and Lebanon sign
2007
First licensing round for
Agreement on Delineation
of EEZ
Exploration rights
Oct
2008
Licence for exploration
Dec
Cyprus and Israel sign
2010
Agreement on Delineation
of EEZ
Nov
2011
Second licensing round for
Dec
Noble Energy announces
2011
natural gas discovery in
Block 12
Spring
2013
Further exploratory drilling
on Block 12
2013
Negotiations for concession
awarded to Noble Energy
for Block 12
gas reserves in remaining
12 Blocks
for further exploration in
blocks 2, 3, 9 and 11
Debt dynamics from 140% debt/GDP level can look scary but Cyprus is sitting
on huge reserves of natural gas and potentially oil reserves too. How much are
these worth? Initial gas reserves discovered are likely worth 300% of GDP. This
could rise to 2950% GDP.
Cyprus will also become more important geopolitically. Given this backdrop,
(a) Europe does not need to force a PSI, and
(b) Europe would be smart to strengthen its energy security. This makes Cyprus
a very different animal to any other EMU sovereign and particularly Greece.
The new lucky country
The massive positive medium-term for Cyprus is the offshore gas reserves found in
the Levant Basin. There are 13 of offshore gas blocks within the Cypriot Republic’s
Exclusive Economic Zone.
Block 12
Excavation has begun in the first field (Block 12) and is being managed by US-energy
firm Noble Energy. Estimates from Noble Energy, the firm responsible for excavations
in Block 12 are that there are there are natural gas reserves of:5-8 trillion feet (142-227
billion cubic metres), with a mean estimate of 7 trillion 6. At current market values this
could be worth €60bn+. The Republic of Cyprus’ share of these revenues from
excavation is reported to be around 60% 7, which would equate to over 200%/GDP.
After the first exploratory drilling found gas reserves last year, a second round of
drilling in Block 12 is due in spring this year. The government hopes to begin natural
gas production by 2017/18 and exports by 2019. 8 Noble has recently noted that its
initial estimates on the gas reserves in Block 12 may have been quite conservative 9.
Cyprus’ Exclusive Economic Zone
Source: incyprus.com.cy
Source: UN, Noble Energy, Cyprusgasnews, RBS
Presidential Candidate Lillikas when in government was intimately involved in agreeing
maritime borders with Cyprus neighbours, a precursor to the gas findings. He has
suggested that Cyprus could disengage from the Memorandum by selling some of the
rights for Field 12 of the gas reserves.
6
http://investors.nobleenergyinc.com/releasedetail.cfm?releaseid=635912
7 Source: http://www.cyprus-mail.com/block-9/bidder-was-switched-over-differing-gasestimates/20121221
8
http://www.globes.co.il/serveen/globes/docview.asp?did=1000776382&fid=1725
9
http://www.cyprus-mail.com/block-12/noble-block-12-could-have-lot-more-gas/20121025
Page 8/10
Cyprus: No need to default.
How much more?
• Negotiations are ongoing on selling concessions for the remaining blocks of natural
At current market prices, total
value of gas reserves could be
worth, €620bn; 34x Cyprus’
(current) GDP
gas. Exploratory drilling in some of these blocks is expected as early as 2014.
• If similar gas finds are made in the remaining offshore Blocks in Cyprus, officials at
the Commerce Ministry have said that as much as 60 trillion cubic feet of reserves
could be within Cyprus’ Exclusive Economic Zone.
• At current market prices the total value of gas reserves could be worth around
Assuming a 20% profit margin,
the value to Cyprus could exceed
of 580%/GDP
$825bn or €620bn; more than 29 times Cyprus (current) annual economic
output. How much this would be worth in terms of net profit is unclear, even to
experts in the field. Assuming a 20% profit margin, the value to Cyprus would
be in the region of €106bn, in excess of 580%/GDP.
• There is also the strong prospect that below the gas reserves there could be oil.
There is also the strong prospect
of Cyprus also finding oil. Noble
energy estimates 25% chance of
finding oil reserves below the gas.
The second round of (deeper sea) drilling on Block 12 this spring could shed further
light on this. Noble estimates there is a 25% chance of a successful oil find.
Obviously, any oil findings would increase Cyprus potential hydrocarbon wealth
further still- particularly as oil excavation and distribution is easier and more
profitable.
Geopolitics:
• Israel has also made substantial gas finds in the Eastern Mediterranean, namely
the Tamar and Leviathan fields. Alongside the finds in Cyprus, these are amongst
the largest natural gas finds worldwide in the last decade.
• Cyprus’ findings could be amongst those to supply natural gas to the EU, via
existing pipelines in Turkey. Moreover, Cyprus has raised the possibility of a gas
pipeline to supply gas from Israel and Cyprus, via Greece, to the EU.
• If Cyprus’ potential significant gas reserves are proven to be anywhere near the top
of the estimated range, it could become increasingly important for the EU’s energy
security, potentially reducing the EU’s reliance on Russian gas exports.
Europe’s Gas Supply Network
Source: UK Parliament, RBS
• Ultimately newsflow on the bailout will make for easy headlines comparing
Cyprus to Greece, but the endgame we believe will be more bondholder
friendlier, helped by political calendars and the staggering resource bounty.
Page 9/10
Cyprus: No need to default.
This communication has been prepared by The Royal Bank of Scotland N.V., The Royal Bank of Scotland plc or an affiliated entity ('RBS'). This material should be regarded as a marketing communication and has not
been prepared in accordance with the legal and regulatory requirements to promote the independence of research and may have been produced in conjunction with the RBS trading desks that trade as principal in the
instruments mentioned herein. This commentary is therefore not independent from the proprietary interests of RBS, which may conflict with your interests. Opinions expressed may differ from the opinions expressed
by other divisions of RBS including our investment research department. This material includes references to securities and related derivatives that the firm's trading desk may make a market in, and in which it is likely
as principal to have a long or short position at any time, including possibly a position that was accumulated on the basis of this analysis material prior to its dissemination. Trading desks may also have or take
positions inconsistent with this material. This material may have been made available to other clients of RBS before it has been made available to you and regulatory restrictions on RBS dealing in any financial
instruments mentioned at any time before is distributed to you do not apply. This document has been prepared for information purposes only. This document has been prepared on the basis of publicly available
information believed to be reliable but no representation, warranty or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained herein and RBS and each of
their respective affiliates disclaim all liability for any use you or any other party may make of the contents of this document. This document is current as of the indicated date and the contents of this document are
subject to change without notice. RBS does not accept any obligation to any recipient to update or correct any such information. Views expressed herein are not intended to be and should not be viewed as advice or
as a recommendation. RBS makes no representation and gives no advice in respect of any tax, legal or accounting matters in any applicable jurisdiction. You should make your own independent evaluation of the
relevance and adequacy of the information contained in this document and make such other investigations as you deem necessary, including obtaining independent financial advice, before participating in any
transaction in respect of the securities referred to in this document. This document is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be
contrary to local law or regulation. The information contained herein is proprietary to RBS and is being provided to selected recipients and may not be given (in whole or in part) or otherwise distributed to any other
third party without the prior written consent of RBS. RBS and its respective affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document
and/or in related financial instruments. Such interest may include dealing in, trading, holding or acting as market-makers in such instruments and may include providing banking, credit and other financial services to
any company or issuer of securities or financial instruments referred to herein. This marketing communication is intended for distribution only to major institutional investors as defined in Rule 15a-6(a)(2) of the U.S.
Securities Act 1934 (excluding documents produced by our affiliates within the U.S.). Any U.S. recipient wanting further information or to effect any transaction related to this trade idea must contact RBS Securities
Inc., 600 Washington Boulevard, Stamford, CT, USA. Telephone: +1 203 897 2700. In Singapore, this marketing communication is intended for distribution only to institutional investors (as defined in Section 4A(1) of
the Securities and Futures Act (Cap. 289) of Singapore). In Hong Kong, this marketing communication is intended for distribution only to Professional Investors (as defined in Schedule 1 of the Securities and Futures
Ordinance of Hong Kong).
Issuers mentioned in any material may be investment banking clients of RBS Securities Inc. and RBS Securities Inc. may have provided in the past, and may provide in the future, financing, advice, and securitization
and underwriting services to these clients in connection with which it has received or will receive compensation. Accordingly, information included in or excluded from this material is not independent from the
proprietary interests of RBS Securities, Inc., which may conflict with your interests.
The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc is authorised and regulated by the Financial Services
Authority.
The Royal Bank of Scotland N.V., established in Amsterdam, The Netherlands. Registered with the Chamber of Commerce in The Netherlands, No. 33002587. Authorised by De Nederlandsche Bank N.V. and
regulated by the Authority for the Financial Markets in The Netherlands.
The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The Royal Bank of Scotland N.V. is in certain jurisdictions an authorised agent of The Royal Bank
of Scotland plc.
Copyright © 2013 The Royal Bank of Scotland plc. All rights reserved. This communication is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part
for any purpose without The Royal Bank of Scotland plc’s prior express consent.
Copyright © 2013 RBS Securities Inc. All rights reserved. RBS Securities Inc. member FINRA (http://www.finra.org) / SIPC (http://www.sipc.org), is a subsidiary of The Royal Bank of Scotland plc. RBS is the
marketing name for the securities business of RBS Securities Inc.
Page 10/10