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Fitch cuts Cyprus rating on exposure to Greek debt

Fitch ratings agency has cut Cyprus’ sovereign credit rating from AA- to A- and is warning of another possible downgrade because of its banking sector’s large exposure to debt-laden Greece.

Fitch ratings agency has cut Cyprus’ sovereign credit rating from AA- to A- and is warning of another possible downgrade because of its banking sector’s large exposure to Greece.

“The downgrade reflects the severity of the crisis in neighbouring Greece and the risk this poses for the Cypriot banking system and consequently the public finances of Cyprus,” said Chris Pryce, Director in Fitch’s Sovereign Group.

Cyprus is a small economy with a large banking system equivalent in terms of assets to approximately nine times its GDP. Exposure to Greece is a significant source of vulnerability that has intensified with successive downgrades of the Greek sovereign since January 2011, when Fitch put Cyprus on Rating Watch Negative citing fiscal and financial sector risks.

Roughly one third of the banking system’s assets are booked as Greek exposure, including that of Greek subsidiaries based in Cyprus. This exposure includes almost €14 billion of Greek sovereign bonds and an estimated €5 billion of Greek bank bonds. In addition, Cypriot-owned banks have lent through their substantial networks in Greece significant amounts to Greek companies and households.

Most Greek-related exposure is held by three major Cypriot banks: Bank of Cyprus, Marfin Popular Bank and Hellenic Bank. These “are relatively well placed to absorb the impact of a sovereign debt crisis in Greece that entailed an assumed 50% haircut to face value of Greek government bonds,” Fitch said.

But in a more severe scenario, in which “non-performing loans rose to 25%, Fitch estimates that the cost of recapitalizing the banks could rise to 25% of GDP, necessitating more extensive sovereign support.” The government likely “would be willing and able to provide effective support to Cypriot banks in a stress test of this magnitude,” but this “could materially alter the government’s debt profile in a manner that would be negative for the sovereign ratings.”

Fitch says developments in Greece will continue to have an important bearing on Cyprus’ ratings, underlining the importance of sound public finances and a robust, well-capitalised banking system.

The latest move by Fitch follows similar downgrades by ratings agencies Moody’s and Standard and Poor’s in recent months based on similar concerns.

Readers' comments

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  • Denis O'Hare says:

    @Robert

    I think we can all agree that the current economic woes affecting most countries stem basically from the reckless lending of banks. In the US for instance institutions were giving mortgages to people who could not afford to repay them, coining the phrase ‘toxic debt’.

    Our Finance Minister has previously said that Cyprus would not be affected, mind you I don’t think anyone believes much of what he says nowadays.

    Current exposure to Greek debt as a result of our local banks’ reckless lending, as witnessed by their regular credit downgradings, threatens to do untold damage to the banking system and economy. It is also difficult to see any way out of the toxic debt developer mortgage scandal without government (EU) intervention as the developer property market has been well and truly stuffed for many years to come due to the Title Deed fiasco.

    The following is an extract from an article in the Cyprus Mail September 2009:

    According to monthly economic indicators, released by the Central Bank of Cyprus in July, there is currently €39 billion of outstanding loans to residents (both corporate and individuals), corresponding to approximately 2.3 times the Cyprus Gross Domestic Product (GDP). The ratio of 2.3 is not as such exuberant when compared to other countries of the Euro area (Ireland’s equivalent figure is 3.6, while Finland’s a mere 1.01), but certainly a high one.

    A further observation with regards to the amount of outstanding loans attributed to households reveals a similar ratio (loans to households divided by GDP) of 1.13. The corresponding EU average ratio stands at 0.62. These figures suggest that, while the leverage of corporations in Cyprus is roughly in line with the European average, Cypriot households are subject to twice as much debt as their European counterparts. It is, thus, individuals, rather than corporations, who will be most severely affected by a possible case of debt-deflation in Cyprus.

    Much of the personal debt (about half) relates to mortgages. A recent study prepared by a large Chartered Surveyors Firm, shows that Cypriot couples could borrow up to 11 times their annual salary income in order to finance the acquisition of a house.

    In contrast, UK banks typically offer mortgages of up to four times the household income. With these arrangements, it is fitting that Cypriots will hold more debt, and not to forget, a much more expensive one, due to the large interest rate differential charged by local banks. The realisation by Cypriot consumers of the real cost of mortgage debt might signal further trouble for the construction sector.
    **ends**

    At that time household debt stood at €20.5billion (housing loans 10.4b) and today stands at €25.7 billion (housing loans 14.5b). Meaning that domestic mortgage debt has risen by €4billion (39%) in less than 2 years – a sign of repayment problems perhaps?

    Does anyone else agree that 11 times salary mortgages are reckless lending ?

  • Gavin Jones says:

    Whether or not one wants to shoot the messengers, in this context the various credit ratings agencies, the facts as laid out in this article and especially in paragraph 4, do not lie.

    Furthermore, the state has raided the public pension pot to the tune of 7 billion euros and the banks are owed 6 billion euros (toxic) by property developers on the strength of fraudulently obtained mortgages. These huge amounts (and others?), in relation to Cyprus’ size, are often sidestepped and when referred to are only done so in vague terms.

    Spin par excellence and worthy of the machinations of Blair/Mandelson/Campbell.

  • Robert Briggs says:

    @ Denis O’Hare. Dear Sir,any idea of the size of the buyer mortgages & is there any risk in this area for the Cyprus banking system?

  • Kwacka says:

    As Dimitri points out, the ratings agencies bear a lot of the blame for the global economic crisis.

    Companies could buy good ratings from them, and companies were handing out triple-A ratings for the ‘junk’ mortgages fraudulently sold to those who couldn’t afford to pay.

    One thing is certain, despite the beliefs of those that see reds under every bed it won’t be the banks and large speculators that lose out.

  • Gavin Jones says:

    Denis O’Hare.

    Once again, your example highlights yet another glaring example of endemic corruption on a vast scale.

    As many of us have been banging on about for many moons, all roads to the continuation of this state of affairs leads to government and their acquiescence, and hence acceptance, of thousands of people being cheated by the so-called bulwarks and guardians of natural justice: lawyers.

    As ever, it’s not that corruption exists exclusively in Cyprus. It doesn’t. It’s the fact that it’s condoned by the Cypriot government, the very institution which should confront it and punish the perpetrators.

    All this merely confirms what a loathsome country this has become.

  • dimitri says:

    @Denis and his post that shows Cypriot business acumen at it’s best, illegal and unacceptable, I am sure you are right about the collusion of all those parties you mentioned….it all boils down to lack of accountability and penalties that are not stiff enough for those who break the law….I feel gutted for the couple mentioned in your post…I think things have taken a step in the wrong direction why ? greed, all it boils down to is greed.

  • Denis O'Hare says:

    It is very difficult for these rating agencies to see the shenanigans going on within the banks, especially when it comes to developer lending.

    As an example, I have an N50 search which a couple obtained after losing all their money to a developer – well they paid their money to their lawyer, who also appears to have helped himself to some of it, judging by the copies of cheques we have recovered. They were buying the safe way, purchase the land and then have the property built all via two separate contracts.

    The search shows that they paid E100,000 for the land, however already on the land was a mortgage for E200,000. How could this be when the land was only worth less than half of this? Surely this would have required a bent valuer, bent banker, bent land registry official and of course the obligatory bent buyers’ lawyer. Since then two memos have been added, E15,000 (tiling company) although no building was started and the bank have put another E715,000 of memo on this single plot of land worth less than E100,000.

    What kind of lending practices are these?

  • dimitri says:

    @Johnny Cyprus, hmmm impossible to know what the reality is, the credit ratings agencies made a mess of the Lehmans bro and bear stearns etc etc cases, yet financial institutions still bring them in to perform the ratings…..perhaps they have painted a gloomier picture than reality, then again without seeing the cash reserves of local banks ‘in the flesh’ who knows what the truth is?on another point maybe the Cyprus gov will end up selling public assets like they have in Greece to make up for shortcomings…..

  • Johnny Cyprus says:

    Dimitri,

    It tells us that they do not have a clue. And I am more worried about the consequences for lenders and depositors than borrowers.

  • dimitri says:

    @john cyprus, well the rbs rating and subsequent bailout must tell us something about these rating agencies? Although i think they now come under stricter regulation and cannot afford to make these blunders in the future so they err on the side of caution so they are not caught out when the proverbial hits the fan..then again there are all sorts of conspiracy theories….either way all this means is that is more difficult for the central bank cy to borrow money on the open markets, and this pressure will trickle down to anyone else in Cyprus wanting to borrow from local banks..

  • Johnny Cyprus says:

    In September 2008, RBS was rated ‘Aa1’. A couple of weeks later they had to be rescued by £40Bn from the UK Government.

  • dimitri says:

    @Andrew, unfortunately yes this is the case, unsuspecting buyers homes are on the line……they don’t get their money from the developer they will go after his assets….still wish to see clarification of what the amnesty laws say….

  • Andrew says:

    @Robert. The banks are not worried about developer loans because they are underwritten by the countless home buyers who have been duped and deceived. Well that is how they see it for now!.

  • @Robert – This was mentioned by Moody’s when it downgraded the deposit and debt ratings of the Bank of Cyprus and the Marfin Popular Bank in July last year.

    See ‘Moody’s cuts Cyprus’ two main bank ratings

  • Robert Briggs says:

    What about their loans to the property developers??

  • Gavin Jones says:

    Not a lot more that can be said about this article which confirms what is already known. With a communist administration locked in a time warp of a failed, discredited ideology, I suspect that a great many Cypriots are unaware of exactly how serious the situation is.

    Economic, as well as geopolitical, Armageddon beckons…

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