STANDARD and Poor’s cut Cyprus’ long-term sovereign credit rating on Tuesday from A+ to A with a negative outlook, due to the credit risk of the island state’s external assets and domestic loan.
“The downgrade reflects our opinion of increased vulnerabilities from embedded credit risk of the Cypriot financial system’s external assets and domestic loan book, and the impact these could ultimately have on public finances,” said Standard & Poor’s credit analyst Benjamin Young.
The banking index on the Cyprus Stock Exchange fell 4.48 percent on the news, according to the Cyprus News Agency, while the main market index closed down 4.41 percent.
Standard and Poor’s said after a decade of rapid expansion, the banks’ balance sheets now exceeded 700 percent of GDP, including both domestic and foreign institutions. During the past ten years, the Cypriot financial system’s total exposure to Greek customers and securities of the Greek government and corporations has grown to exceed 2.5 times of the nation’s GDP.
“Although the system reports high capital levels, the sheer size of Cyprus’ financial centre poses funding risks in our view,” said the statement.
In addition, the relative size of Cyprus’ domestic credit, which stands at 280 percent of GDP, is among the highest in Europe. Much of it is collateralized by property assets, which have suffered an overall decline in value in the last two years, the rating agency added.
The Cyprus Finance Minister Charilaos Stavrakis insisted that local banks were well capitalised and able to absorb any shocks from Greece. However he did acknowledge that local banks had “some” exposure to Greece.
“It is clear now that they (S&P) worry less about public finances, and much more about the perceptive risks of the Cypriot banking system,” he said.
Asked about bank exposure to Greece, he said: “I have seen the numbers myself and there is some exposure to Greek government bonds … even however in the very theoretical scenario that there was a problem with Greece, the banks of Cyprus have solid capitalisation and could absorb such losses.”
Meanwhile, President Demetris Christofias urged the nation and its political parties to show understanding and responsibility to help the country get out of the financial crisis.
Cyprus’ 2010 fiscal deficit is expected to remain largely unchanged at 6 percent of GDP, compared with 2009 levels. The government has introduced austerity measures, new duties and taxes in a bid to cut the deficit in 2011 to 4.5 percent of GDP.
“Small moves and a bit of understanding can help the economy exit easily from this situation, just as it had entered. I therefore appeal to you all to help in this direction,” said the President when he addressed a meeting of local business people.
The European Commission requires that Cyprus bring its deficit to within the Maastricht Criterion of 3% of GDP by 2012.