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Moody’s cuts Cyprus rating on default risk

Moody’s cut Cyprus government bond credit rating by three notches to Caa3 from B3 due to an increase in government debt and issued a warning that the country had a 50 per cent chance of default.

MOODY’S Investors Service slashed the Cyprus government bond rating late on Thursday to Caa3, citing the anticipated increase in the government’s debt burden.

In addition to Thursday’s three notch downgrade, Moody’s added that it saw a 50 per cent probability the Mediterranean island would “default outright or press for a distressed exchange” on its debt.

Moody’s has downgraded Cyprus’ rating nine notches over the past 10 months and the country’s rating now stands just three notches above default.

The outlook is negative reflecting Moody’s view that the situation could deteriorate over the next 12 to 18 months due to:

  • Liquidity concerns. Although Moody’s base assumption continues to be that access to short-term funding will remain sufficient for the Cypriot government to meet its funding needs, the rating agency notes that, in the absence of a disbursement from the Troika, the government may face a severe crisis.
  • Bank recapitalisation needs. The government has employed a US asset manager, Pimco, to estimate the banks’ recapitalisation needs. Until its report is finalised later in January, there will be lingering uncertainty about the amount of support that the government will need to provide to Cyprus’s banking sector in 2013.
  • Progress of negotiations with the Troika. While Moody’s believes that the current agreement in principle between Cyprus and the Troika on an MoU represents significant progress, the rating agency notes that the finalisation of an agreement and disbursement of funds have been delayed and that an assessment of debt sustainability has also not been completed. Moody’s base assumption continues to be that the Cypriot government will be able to reach an agreement with the Troika that will result in the provision of official assistance to the Cypriot government until at least 2016 – however, questions about debt sustainability remain central to Moody’s views on the probability of a default event for Cyprus.

Readers' comments

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  • Steve says:

    As the Chinese would say, we live in “interesting” times. A recent Cyprus News edition ran an article quoting views of Psychiatrists on President Christofias’s behaviour, coming generally to the conclusion that he has serious mental issues.

    I thought that in such case most countries have a clause in their constitution ensuring that the President is put in a straight jacket and escorted to a secure holding place. This has not happened in Cyprus and as a consequence the Comrade President’s recent rantings have upset the Germans and they have decided to play games with him. By the end of January/mid February the Cyprus credit rating could be down a couple more notches and the Russians, the major deposit holders in Cyprus, could be looking at emptying their rouble and Euro accounts.

    The obvious way out of this would be for the Cyprus government to approach others for a loan. They have already tried China and Russia and got nothing, so who is left? The Turks have the money but let’s not go there; the Greeks as Cyprus’s best friends should be first in line but can only offer moral support as usual because that costs nothing.

    What a mess!

  • Martyn says:

    Gavin you are right! RoC is, sadly, facing, potentially, the 2nd largest ever, globally, Bail-Out. This from a position of relative strength but based largely on tourism, property, and ‘international investment’, some of the latter two classed as ‘dodgy’ based on comments made here and elsewhere. And the country locked in to an unsustainably high Euro – that allows little or no room for manoeuvre – and still ‘ducking and diving’ in its negotiations with the Troika. Given ingrained Cypriot culture and attitudes, can ANYONE, see a way out?

    MedGas maybe and trickles of investment from the likes of Russia and China, but a serious, strategic ‘Way Out’ (of the mess, the Euro?) and ‘Way Forward’ (based on wider economic development, a complete overhaul of the country’s legal and administrative systems and the ability to manage and capitalise from the much lauded Gas). Even with ‘new attitudes’ and ‘new approaches’ (new Government!) I can’t see the country climbing back to stability and into a new phase of growth within the next 5-7 years.

  • Costas Apacket says:

    Gavin, they only need 170 million Euros per month to cover Public Service costs.

    Surely Catastrofias has this covered well into the future?

  • Gavin Jones says:

    It speaks volumes that in order to pay public sector salaries in December the government had to raid the pension funds of CyTA and the Electricity and Ports Authorities.

    It’s an understatement to say that the situation is bleak and the noises coming from Chancellor Angela Merkel and German parliamentarians aren’t exactly encouraging.

    The number of warnings that the Cypriot government has received are legion and yet their arrogance and insistence on not facing reality have destroyed the country.

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