THE move by Fitch puts the Island’s long-term foreign and local currency ratings at BBB, a notch closer to junk level than last month’s downgrades by credit ratings agencies Moody’s Investors Services and Standard & Poor’s.
The Director of Fitch’s Sovereign Group, Chris Price said: “The two-notch downgrade of Cyprus’s ratings to ‘BBB’ reflects the actual and anticipated fiscal slippage, compounded by Fitch’s expectation that the sovereign will be unable to access the international debt markets in order to refinance an increasing debt maturity profile in H211 and H112. The 2011 deficit is now expected to be close to 7% of GDP and not all of the increase, from 4%, since the agency’s most recent analysis in June can be attributed to the naval base explosion, which took out half of Cyprus’s electricity generating capacity”.
On 11 August, the new government intends to put before parliament an austerity package to be implemented mainly in 2012. Fitch understands that the package is designed to restrain public sector wage costs and employee numbers, cut welfare costs by better targeting of recipients and raise taxes. If agreed by parliament and successfully implemented, it would cut the prospective 2012 general government deficit by about 3.5pp to 2.5%, effectively restoring the expected fiscal position reported in the 2011 Stability Plan.
Fitch understands that the package has been endorsed by the leaders of all the main parties and agreed with the Social Partners.
While Fitch anticipates that the austerity package will be approved by parliament, the agency remains concerned about the execution risks of implementation, particularly given the inability of previous administrations to address fiscal consolidation and structural reform measures. – Fitch Ratings-London-10 August 2011