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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)