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Moody’s downgrades Cyprus sovereign ratings to junk

Moody’s Investor Service cut Cyprus’ sovereign ratings to junk earlier today saying there was a heightened risk that the government would have to support the banks, which are heavily exposed to the Greek debt.

MOODY’S Investors Service downgraded Cyprus’s government bond ratings by one notch earlier to today to Ba1 from Baa3 and said that the outlook was negative.

Moody’s also downgraded Cyprus’s short-term rating to Not-Prime from Prime-3. Today’s rating action concludes the review for downgrade that Moody’s initiated on 4 November 2011.

In making its decision, Moody’s said that ”the increased risk that the Cypriot government would have to provide renewed financial support to the country’s banks because of their exposure to the Greek government and economy, and the commensurate impact of such measures on the government’s own financial strength.”

It also refers to ”the likely impact on market confidence in Cyprus stemming from these banking-sector concerns, as well as broader uncertainties about Europe’s macroeconomic prospects and institutional frameworks.”

”Overall, the fragile market confidence in Cyprus, which has already led to a loss of access to international debt markets, is likely to continue, with a high potential for further shocks to funding conditions for the sovereign and the domestic banks.”

Moody’s also said that its action was limited to one notch ”in acknowledgement of the positive developments in Cyprus since Moody’s placed the country’s rating on review for downgrade in November 2011.”

Moody’s is the second rating agency to downgrade Cypriot bonds to junk level after Standard and Poor’s (BB+). Fitch’s ratings has placed Cypriot bonds to BBB-, one notch above junk.

Government response

The Island’s Finance Minister said that Moody’s downgrade was “not justified”. Kikis Kazamias, who was commenting on today’s downgrade, said that he recognises the challenges the Cyprus economy must face due to its exposure to the Greek debt and the Eurozone crisis in general.

Mr Kazamias noted that the government remains focussed on preserving its fiscal targets, implementing growth measures and securing the necessary resources to cover all of its financial needs.

Readers' comments

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  • Martyn says:

    First: the Downgrade was to be expected as the Cyprus economy spiralled downwards, especially after the recent severe Haircuts on the Greek bonds.

    2nd: the ‘not justified’ comment by the Minister is just another example of Ongoing Government denial (securing the necessary resources’ probably means tapping the Russians for yet more loans?.)

    3rd: and potentially the most serious: Hector is absolutely right to wonder how, so far, the Cyprus banking system has not collapsed. The Big deposits and credit balances will be ‘long-gone’, the realistic asset backings for property & construction loans must by now be perilously low. Any new Stress Tests will surely point to something akin to the Greek, Irish and some of the Spanish banks.

    Any projected oil/gas revenues will surely come too late to avoid the likely crash….

    So maybe some more chunky Russian, low-interest loans had better be being negotiated NOW!

  • out of the frying pan into the fire says:

    Thanks U Boat you have really cheered up my day.

    So their credit rating matches that of their Lawyers and Developers. JUNK.

  • hector says:

    I’m surprised that the banking sector hasn’t collapsed.

    How does the banking system manage to stay afloat when the collateral I think they must claim to hold against loans cannot be worth anything like the balance sheets say?

    Are these loans actually being repaid or are the books just showing huge sums owed by way of outstanding loans which in reality will never be repaid?

    Does anyone really know the true financial state of the banks in Cyprus?

  • UBoat says:

    They are still in denial ….. As usual.

    Lets do the head in the sand and pretend its all alright……

    Ah well…. Same old ****. Any one want to buy my villa, comes with standard Cypriot legal (and not so legal) ********? I bet I see a good number of new Merc’s porches and Audi’s this year again! All paid for by borrowing against property they have already sold because they won’t let the title deeds go.

    What a country this has turned out to be?

    Cheer’s all have a nice day.

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