FITCH, the third-largest rating agency, downgraded the sovereign credit ratings of Cyprus from BBB to BBB-; Italy to A- from A+; Spain to A from AA-; Belgium to AA from AA+ and Slovenia to A from AA- on Friday.
All of the ratings were given negative outlooks, indicating there is 50 percent chance of further cuts in the next two years.
In its statement on Cyprus, Fitch said that “the one-notch downgrade of the sovereign rating mainly reflects the Cypriot banks’ large capital need in light of the Greek debt restructuring expected this quarter.
Fitch estimates that the amount needed to recapitalise the three largest banks to a Tier 1 ratio of 10% following a 50% haircut on Greek government bonds amounts to €0.9bn or 5% of GDP. A 70% haircut would require €1.7bn or 9.9% of GDP. The now higher likelihood of a haircut in the 50%-70% range, compared with Fitch’s view in August, when a 20%-30% haircut was the agency’s baseline, is the primary reason for the rating downgrade
As the Cypriot banks are large holders of Greek government bonds, the potential capital requirements will be correspondingly high. Fitch believes it is highly uncertain whether the necessary funds will be found in the private sector or whether government assistance for certain institutions will instead be required to meet such capital requirements. This would increase the government debt/GDP ratio and might require external assistance.”
Finance Ministry response
Cypriot economy has excellent prospects for the future
The economy of Cyprus is based on solid foundations and has excellent prospects for the future, the Ministry of Finance stressed in a press release issued as a response to Fitch Rating Agency’s decision on Friday to downgrade the Cypriot economy.
The Ministry of Finance in its announcement points out that despite Fitch’s decision, Cyprus remains within the acceptable investment area.
Furthermore, it notes that “despite adversity and negative external influences, the Cypriot economy is based on solid foundations and shows excellent prospects for the future”.
“The ability, openness, hard work and flexibility of the business people, together with the high quality level of the workforce and the social cohesion of Cyprus constitute today, as they have in the past, the cornerstone of Cyprus’ economic progress,” the Finance Ministry states.
It notes that with this in mind, the government of Cyprus, in collaboration with the private sector, will soon promote a package of development measures.
Furthermore, it stresses that the Ministry, in collaboration with the Central Bank of Cyprus, systematically monitors the management of challenges in the financial system.
The Ministry of Finance expresses conviction that banking institutions will be able to implement their plans to obtain the funds needed, with their own actions.
“The Ministry’s faith to the banking system in Cyprus is proved in practice by its systematic deposits in banks,” it is noted.
It adds that on the day Fitch decided to downgrade Cyprus’ economy, the Ministry of Finance was auctioning treasury bills with banking institutions which offered 164% of the amount requested by the Ministry.
As regards the cost of living allowance (COLA), the Ministry notes that through a constructive social dialogue the necessary changes will be achieved, while respecting social justice.