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Two Cypriot banks downgraded by Moody’s

YESTERDAY, Moody’s Investors Service took actions on three Cypriot banks to reflect the increased risk of a Greek exit from the euro area. Moody’s says that the banks’ extensive operations in Greece render their capital positions vulnerable to such an event.

Moody’s has taken the following rating actions:

Ratings Rationale

Yesterday’s actions on the Cypriot banks primarily reflect Moody’s view, as expressed on 1 June 2012, of the increased risk of Greece exiting the euro area.

Although a Greek exit is not Moody’s central scenario, the rating agency says that it considers the risk of a euro exit by Greece as substantial and recognises that the probability of such an outcome may increase further following the Greek parliamentary elections on 17 June.

The rated Cypriot banks maintain extensive branch operations in Greece, with exposures to Greek borrowers amounting to 42% of net loans for CPB, to 34% of gross loans for BoC, and 17% of gross loans for Hellenic. As such, their capital positions remain susceptible to the direct and indirect consequences of a Greek exit.

The heightened risk of a euro exit could lead to an acceleration in deposit outflows from Cypriot banks’ Greek branches, pressuring liquidity, whilst a euro area exit – triggering currency redenomination, a likely sovereign default and widespread economic stresses – would materially weaken the banks’ solvency.

Yesterday’s downgrades incorporate the impact of the increased risk of a Greek exit in the Cypriot banks’ ratings and reflect, on a relative basis, BoC’s sizable and Hellenic’s moderate exposures to the Greek operating environment. CPB’s ratings incorporate the severe solvency and liquidity risks that the bank faces.

Further reading

Press release: Moody’s downgrades two Cypriot banks