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Thursday 1st October 2020
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Second agency cuts Cyprus credit rating

STANDARD & POOR’S cut Cyprus’ credit rating by one notch on Friday and warned another cut was possible, deepening economic gloom for the island struggling with its worst peacetime disaster and mounting speculation it might be forced into an EU bailout.

Citing inconsistent commitments to spending cuts and risks of contagion from Greece’s debt crisis, S&P said the outlook for its BBB-plus rating remained negative.

On Wednesday Moody’s also downgraded the Cyprus economy from A2 to Baa1 and on Thursday it also downgraded the island’s two largest banks, the Bank of Cyprus and Marfin Popular Bank, because of their exposure to the Greek debt.

It was the second agency to cut Cyprus’ rating this week, bringing it in line with Moody’s Baa1 rating announced on Wednesday while Fitch remains one notch higher at A-minus.

Markets have been closely watching Cyprus for signs of stress for some weeks; yields on its international bonds have risen steadily this year and a July 11 blast which destroyed the island’s largest power station triggering political turmoil has deepened fiscal woes.

Cyprus’ central bank governor Athanasios Orphanides has warned that without urgent remedial action Cyprus could be forced into an EU support mechanism.

Dismissing such a suggestion, the government says it has met its financing needs domestically this year but it is unclear if that factors in the cost of a blast damage bill, estimated anywhere between 1 and 3 billion Euros. The top range of that estimate is equivalent to 17 percent of Cyprus’ GDP.

Discussions on spending cuts are in disarray after opposition parties accused the government this week of backtracking on reform pledges, and Cyprus’ cabinet tendered its resignation on Thursday to quell public anger at the blast, caused by munitions stored next to the power station.

The yield on a 10-year government bond issued to international investors in February 2010 was bid at 9.7 percent on Friday, up from 9.5 on Thursday and around 6.20 percent in early May. Cyprus is not a regular with international debt issues, and trading in its bonds is thin.

Deficit targets unlikely

Fitch said it believed Cyprus would struggle to meet its 2011 general government deficit target of less than 4.0 percent of GDP, and its 2012 target of 2 percent.

Missing those targets would exert pressure on general government debt which was anticipated to reach 80 percent of GDP by the end of 2011, after incorporating a 2.79 billion euro repo facility due to expire at the end of November 2012.

Such a substantial rise in general government debt is likely to reduce the Cypriot government’s capacity to back-stop its domestic banking sector, which in our view is vulnerable to the potential restructuring of government debt in Greece,” Standard and Poor’s said.

Cypriot banks’ total exposure to Greece, which included bank, sovereign and loans in the Greek market, was equivalent to more than 160 percent of GDP. Although the Cypriot banking system was well capitalised, S&P said it anticipated potential losses in Greece could reduce current capital levels.

“Our baseline expectation is that the Cypriot government will not need to recapitalize the banks in the near future, but the ongoing uncertainty in the external environment increases the risk of this eventuality,” S&P said. – (Reuters)


  1. CYPRUS may soon have to seek an international bailout, becoming the fourth state in the euro zone to request a rescue if it does not take urgent action to repair its finances, the island’s largest commercial bank warned on Monday.

    “With our inaction we are risking the ability of refinancing the state and the consequences will be immediate and serious,” Bank of Cyprus said in a statement.

    “There is an imminent threat of Cyprus joining the European Union support mechanism, with whatever drawbacks that will entail.”

    Since the euro zone’s sovereign debt crisis erupted last year, the EU and the International Monetary Fund have announced multi-year bailouts of Greece, Ireland and Portugal totalling 382 billion euros (336.1 billion pounds).

    A rescue of Cyprus, which accounts for only about 0.2 percent of the 17-nation euro zone’s economy and earlier this year was expected to have gross financing needs of roughly 2 billion euros for 2011, would not strain Europe’s resources.

    But it would be an unwelcome reminder of how the region’s debt crisis can spread as problems in one country affect other states. All three major credit rating agencies have downgraded Cyprus in the last several months because its banks are sitting on an estimated 5 billion Euros in Greek sovereign debt and its economy is heavily exposed to Greece through trade.

    On Friday, Standard & Poor’s downgraded the island again by one notch to BBB+ and warned that another cut was possible, citing the government’s inconsistent commitments to spending cuts as well as exposure to Greece.

    Talks on spending cuts were left in disarray last week, as opposition parties accused the government of backtracking on reform pledges and the cabinet tendered its resignation in response to public anger over a munitions blast that destroyed the island’s biggest power station, causing an energy crisis.

    No bailout talks

    The European Commission said in a statement on Monday that a financial assistance programme for Cyprus was not being discussed, adding: “We are confident the Cypriot authorities will fulfil their commitments” to cut the budget deficit.

    The island’s Finance Ministry said Cyprus had no significant funding needs until mid-December and would continue efforts to find additional financing, domestically and internationally, for requirements after then.

    In the wake of the destruction of the power station, Cyprus may receive EU funds for infrastructure development, which could reduce pressure on it to seek a financial bailout. Also, the government has traditionally been able to rely on cash-rich local banks to buy much of its debt.

    Nevertheless, soaring bond yields on Monday showed some investors were speculating about the possibility of severe financial trouble. A euro-denominated Cypriot 10-year government bond issued to international investors in February 2010 was bid at 10.54 percent on Monday, up from 9.71 percent on Friday and around 6.20 percent in mid-May.

    Central bank governor Athanasios Orphanides warned authorities two weeks ago that a bailout was likely without immediate action to correct fiscal imbalances.

    Bank of Cyprus said any bailout would damage the island’s reputation as a financial services centre. Cyprus offers a series of tax breaks to international businesses, and might not be able to continue providing all of them under the terms of an international rescue.

    The island received more bad news on Monday when data showed the central government budget deficit widened sharply in the first half of this year to 3.47 percent of gross domestic product on a cash basis, from 1.87 percent a year ago. Revenue fell 1.42 percent while expenditure was 9.15 percent higher.

    Authorities have said they are aiming for a general government budget deficit, which also includes accounts for local governments and some semi-governmental corporations, of 4.0 percent of GDP or less for 2011, after a 2010 shortfall of 5.3 percent.

    But that forecast was made before the July 11 munitions blast slapped the state with a bill which, according to opposition parties, could reach 3 billion Euros. Preliminary finance ministry assessments have slashed the island’s growth outlook this year to zero from expansion of 1.5 percent.

    Analysts believe Cyprus cannot continue financing itself over the long term if it has to return to the market at current yields. Credit default swaps for Cyprus, used to insure against the threat of a sovereign default, hit a record high of 707 basis points on Monday, more than triple their January level and closing in on levels near 1,000 bps for the euro zone’s weakest states, according to data monitor Markit. – (Reuters)

  2. Unusually Cyprus was mentioned on the BBC earlier today.

    According to a report The Bank of Cyrus had indicated that a bailout would be required.

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