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Tuesday 14th July 2020
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Cyprus’ top three banks downgraded by Moody’s

INTERNATIONAL ratings agency Moody’s has downgraded the Marfin Popular by three notches to B2 from Ba2 and has cut both the Bank of Cyprus and Hellenic Bank by a single notch to Ba2 from Ba1.

Moody’s added that the three banks, which are the island’s largest lenders, could be downgraded again.

Moody’s actions today come in the wake of its downgrade of the Cypriot government bond rating by two notches to Baa3 four days ago, over what it said was the increased possibility that the Island’s banks may need support from the government next year.

A further cut and Cyprus’ sovereign rating will be considered junk, raising fears that the Island may well need a financial bailout from its eurozone partners.

According to Moody’s, today’s downgrades result from the reduced ability of the country to support its large banking system.

The rating’s agency said that the Marfin Popular bank’s has a higher exposure to Greek government bonds compared with the other two banks and that this makes it more likely that it will require a large capital injection from the government. It said that following last month’s European debt deal for Greece, which includes a 50% ‘haircut’ on Greek bonds, that Marfin’s losses would more than double.

Referring to the other two banks, Moody’s said the Bank of Cyprus and the Hellenic Bank, which are both less exposed to Greek bonds than Marfin, could cover their losses from the proposed write-off without needing external help. However, it warned that any further ‘haircuts’ on Greek bond holdings cannot be ruled out in the future – and this would exert additional pressure on the banks.

Comment

Director General of the Association of Cyprus Banks, Dr Michalis Kammas, said that the Island’s banks remain stable and are ready to deal with the challenges that may arise.

Commenting on the Moody’s downgrade of Cypriot banks, he said that this latest move is simply a follow-up to Moody’s latest downgrade of the Cypriot economy last week. He also stressed that during this difficult time, it is essential to restore public finances. He added that achieving a budget surplus would send a message to the markets and restore confidence in the Cypriot economy.

Finance Minister Kikis Kazamias said that the government is expected to submit a new package of financial measures. Kazamias, who was in Brussels for today’s EU finance ministers’ meeting, noted that the instability in Greece has immediate effects on the Cypriot economy.

The Finance Minister also noted his concern over Moody’s double downgrade of the economy saying that it was excessive. On his return to the Island he said that the government must look into additional measures to improve the state of public finances.

Kazamias said that the constant criticism by the opposition of government policies had prompted the credit rating agencies to cut the Island’s ratings.

DISY’s Averof Neofytou called on the government to take measures to support the Island’s economy before it’s too late. DIKO said that the latest downgrade was expected, accusing the government of choosing to become a spectator as the spiral of downgrades continues.

AKEL spokeman hit back at DIKO and DISY parties for constantly slating the government’s attempts to handle problems, which he said that others had created. And EDEK said that the government’s inaction had lead to soaring Cyprus bond yields.

Meanwhile, President Christofias said that the global economic crisis has created very difficult conditions with direct negative consequences to the Island’s economy, adding that that everyone must contribute to help overcome the difficult situation. Speaking at the Annual General Meeting of Cyprus Municipalities, the President said that despite the current economic difficulties, the government will continue to support the local authorities as it has done for the past three years.

Further reading

Moody’s downgrades three Cypriot banks following Cyprus sovereign downgrade; banks on review for further downgrade (subscription)

19 COMMENTS

  1. GREAT interview Nigel!

    George Soros was spot on: government bonds (and banks’ credit ratings, thus giving them access to cheaper money that they could then lend on) were priced the same all over the Eurozone. This meant that it became possible for the Cyprus government and a certain class of Cypriot to borrow cheaply and basically line their own pockets by way of exponential amounts of property development, the sale and construction quality and legality of which was irrelevant, completely unaffordable public sector perks etc.

    There thus existed a ONCE IN A LIFETIME OPPORTUNITY for the guys in Cyprus with access to this money (the rusfetti) to line their pockets, irrespective as to what would happen to the country afterwards.

    So the question has gotta be this:

    Was it all by pure coincidence that a certain class of Cypriot borrowed and borrowed and borrowed again, bought luxury cars, lived THE lifestyle and spirited the rest of the money offshore, then declared (or are in the process of declaring) themselves bankrupt, leaving an unholy mess for everyone else?

    A quotation: “Coincidence is the word we use when we can’t see the levers and pulleys”. Emma Bull

    We are dealing with really clever people here who saw an opportunity, as a one-off, and took it. A bit like the restaurant owner who thinks you’re a tourist and tries to completely stitch you up, knowing that he’ll never have to see you again…

  2. There is some talk that the EU (Germany & France) are secretly working on a plan to ditch the lame duck med countries (Portugal, Greece & Italy). Cyprus had better get their economy back on track quickly, or they are likely to be on that list.

  3. Have the Cyprus government really made a mess of things though?

    I mean, we’re not all economists or financial gurus (even if we were, the job of an economist isn’t to be more right than anyone else: he’s just as wrong, but for more complicated reasons! I know, it’s an old one…) but as all subscribers have pretty much accepted and as Nigel states below, in order to make an attempt to balance the books, the government needs to:

    1. Increase the amount it gets (taxes, loans)
    2. Reduce what it spends
    3. Stimulate growth (getting the housing market sorted etc).

    However, it’s not doing any of these significantly (apart from borrowing money).

    Why are they so stupid when it’s SO obvious what to do to avoid a Cyprus default?

    Here’s an alternative view…

    By joining a certain club (according to some, ME included, the most corrupt club in the world, that’s if corruption is measured in terms of amounts of money swindled. Did anyone hear Sarkozy saying the other day, “Maybe Greece’s finances were not sufficiently strong for it to join the Euro”. Hold on a sec’, wasn’t its books inspected by EU-appointed auditors and passed as “acceptable”? I wonder how that happened then…), Cyprus could get access to HUGE amounts of money to borrow. It could do so with government paper (bonds) or through the banks by saying it needed the money to build to meet a huge demand for property (would be interesting to see the figures on how much property development loans were obtained compared to actual completed buildings), all at rates that little ole Cyprus would never normally get.

    All these loans would eventually work their way into the pockets of the chaps who run the country (previously referred to as the rusfetti), through either bloated public sector pay and perks, property sales, fees for conveyancing and thousands of court cases re: the CIVIL matter of property fraud, all requiring the services of a rusfetti member.

    If Cyprus were to default, as its books didn’t balance, who would have to pay back the money? The politicians, property developers, lawyers (who are all the same people, by the way)? No, of course not! Either the EU would bail the country out (as the cost to German and French banks of the single currency failing blah blah blah) or the country would hold up its hands and say, “Sorry international community, we have no cash” and Cyprus’ credit rating would go back to junk (which it sort of was before it joined the EU anyway).

    This whole EU nonsense was a gravy train designed to transfer assets from the rich nations of Europe to the elite members of Cyprus society. We, the property-purchasing British ex-pat, have simply been caught in the crossfire (hence being completely ignored etc).

    Is this long-term planning, top to bottom conspiracy too clever for the “ignorant villager” Cypriots?

    In the famous words of Cartman (of South Park fame), “Just look at the score, Homie, just look at the score”.

  4. @desmo50, I agree, not doubting it for one minute, sad thing is who can we trust anyway?, it wasn’t long ago that the main banks here passed the EU stress tests…..anyway for what it’s worth the combined assets value of Laiki and bocy is 64bn euros….anyway for all those worried about their savings here the central bank of Cyprus covers depositors to the tune of 100,000 euros per depositor per institution (if the gov. doesn’t go bust that is!)

  5. Dimitri – there are UK banks exposed to Greek debt but only to a far lesser degree, the Bank of Cyprus has investment to the tune of 73% of its Equity and my UK bank has only 1% of its Equity, you do the maths.

  6. The government have had plenty of time to stimulate one of the largest parts of the economy. The property market.

    I know times are difficult in the international property market, but you don’t need me to say that it is virtually impossible to make a bigger mess of it than they have.

    Going by their track record, I am sure they will manage to mess everything else up.

  7. @Jim, you forgot mr. pissarides the nobel prize winner is on call for the govt. but I doubt they will listen to him, he has made warnings about the state of the economy before, I think all govts. present and past were of the mindset where doing favours and sorting out your chums and family with cushy govt jobs was priority..ok the odd few do rock the boat e.g mr.n.papadopoulos but what this place needs is actions not words

  8. Nigel. There are three ways of balancing the books.

    1. Cut spending. There is much the government can do here, & is by far the preferred option. Unfortunately they do not want to upset the unions.

    2. Raise more money by raising taxes, or borrowing more. Raising taxes, is usually counter productive, if taken to the levels that would be required.

    Borrowing more is insane & only leads to ruin.

    3. A sensible combination of all three. I order of priority, 1. Cut spending. 2. Raise taxes. 3. Borrow.

    I have grave doubts the current government has the basic skills to manage the economy.

  9. @dimitri – the Guardian newspaper has published an article containing a list of the major banks around the world and their exposure to Greece.

    See – Greece debt crisis: how exposed is your bank?

    After the Greek banks, the hardest hit would be those from France and the 11 German banks with stakes in the country.

    There is also some €2.3bn invested by British banks too.

  10. @Jim – the government has to do three things:

    1. Increase the amount of money it receives into the state coffers. It can borrow as it already has done from Russia and it can issue bonds (but these would have to offer very high returns). It does not necessarily mean that it will have to increase taxes (although this is easier and probably less costly than tracking down the cheats).

    2. It has to reduce its expenditure – cuts in government payroll, COLA, reducing headcount, etc.

    3. Stimulate growth in the economy (such as the announced, but yet to be implemented, changes in Property Transfer Fees).

    Getting all three right is extremely difficult!

  11. “Finance Minister Kikis Kazamias said that the government is expected to submit a new package of financial measures”.

    No doubt this means raising taxes, rather than cutting the bloated & highly paid civil service.

    The average Cypriot is very poorly paid & raising taxes, will only result in less disposable income to be spent in the market place. This results in less actual tax income being received.

    The government must cut spending & not raise taxes.

  12. @moyra blackie – the recent €2.4 billion loan from Russia will only keep Cyprus afloat for a few months into 2012.

    One of the major issues that the government has yet to tackle to get the Island’s finances in order is the public sector pay, pensions and cost of living allowance (COLA).

  13. I thought this is why Christofias asked Russia for a loan of 2billion. He didn’t want the EU bailout, as the interest would be higher.

    Wasn’t this money deposited recently from Russia?

  14. I think it’s time to remove all savings back to the UK, I don’t trust anyone here to tell us the truth, and if there is a real danger of the banks exposure to Greek debt then I would feel that my money is safer in the UK.

Comments are closed.

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