STANDARD & Poor’s cut Cyprus’ long-term sovereign credit rating by a notch to ‘BBB’ from ‘BBB+’ yesterday, referring to the banking system’s exposure to the Greek sovereign debt.
In its press release, Standard & Poor’s said “In our opinion, the contingent liabilities posed to the Cypriot government by the Cypriot banking system’s exposure to Greece continue to weigh heavily on the ratings on Cyprus.”
“We believe that a Greek default scenario with private sector involvement (PSI) or “haircuts” higher than previously agreed by commercial creditors would necessitate the recapitalization of some domestic banking institutions.”
“We also believe the effect of a Greek government default could reverberate through Cyprus’ economy in the form of private-sector funding costs increasing beyond our previous expectations, thereby reducing investment and overall domestic demand.”
“Furthermore, weaker economic growth could worsen the Cypriot government’s debt dynamics and reduce the willingness of its political leaders to press forward with fiscal and labour market reforms.”
“We estimate the exposure of Cypriot banks to Greek debt (sovereign, corporate, and bank combined) at about 165% of Cyprus’ GDP.”
Commenting on the €2.5 billion bilateral loan agreement with the Russian government, S&P said that “this could help alleviate funding pressures well into 2012”.
However, it cautioned that temporary measures “would not structurally improve Cyprus’ public finances” and that “one-off agreements could reduce the willingness of social partners to agree to the planned fiscal consolidation measures”.
The move came only hours after EU leaders reached an agreement in which banks holding Greek debt would accept a 50 per cent “haircut” write-off.
Government response
Reacting to the S&P decision, in a statement, the government of the Republic of Cyprus “acknowledges the challenges which the Cypriot economy is facing due to the negative developments from Europe’s debt crisis”.
For this reason, it adds, “the Government intends to act promptly and decisively to take all necessary measures to achieve fiscal consolidation and to handle the challenges of the banking system in cooperation with the Central Bank”.
It urges the political parties to vote in favour of the 2012 Budget as well as all measures for fiscal consolidation “to give the message to markets that the Republic of Cyprus is determined to handle the challenges in an effective and decisive manner”.
On August 26th the House of Representatives approved the first of two packages of austerity measures aiming at fiscal consolidation. Presenting the 2012 state budget, Finance Minister Kazamias said it contains structural measures aiming to avert negative developments to the Cypriot economy.
It provides for total revenues of 6.22 billion euro, compared with 5.64 billion of 2011 and total expenditures, excluding loan payments, of 7.54 billion euro compared with 8.01 billion of the 2011 state budget.
The budget also includes provisions for a 10% reduction in entry-level salaries for civil servants, abolition of 1,100 vacant positions in the civil service, continuation of the freezing of procedures to fill up vacancies and for reducing by 200 million euro social benefits both by lowering the level of benefits and by introducing income criteria for certain benefits.
The great unknown is, where is a safe place to invest your cash?
The USA & UK’s debt mountains are rising at astronomical rates. The mighty US dollar is likely to collapse at some point, due to years of living beyond their means & a lack of resolve to reverse this. Most of Europe is at risk unless there is fiscal union, eventually causing the Euro to fail.
Probably best to invest the cash in Chinese lessons for your grandchildren. The Chinese will soon own the world.
Jim, why keep ‘serious’ money in a Cyprus bank at all? Big risk, modest reward. Funds up to €100k might be ‘guaranteed’ but WHEN might depositors get their money back?
It will be at D junk when the developer debts come home to roost.
Between exposure to Greek bonds & developer loans, Cyprus is a bigger basket case than Greece.
I believe it impossible for a nation of 800,000 people to avoid a large handout from the EU, given the sums involved.
Under no circumstances keep more than €100,000 in any one Cyprus bank. Even then pray that the EU will step in & support the government bank deposit guarantee scheme, as it has nowhere near sufficient funds to pay up.