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Fitch cuts Cyprus credit rating to junk

Credit ratings agency Fitch downgraded the Island’s credit rating to “junk” status earlier today due to the amount of rescue money needed to bail out its banks, which are heavily exposed to the Greek economy.

FITCH Ratings has downgraded the Republic of Cyprus’ Long-term foreign and local currency Issuer Default Rating (IDRs) to ‘BB+’ from ‘BBB-‘. The Short-term IDR has also been downgraded to ‘B’ from ‘F3’. The Outlook on the Long-term IDRs is Negative.

Fitch has simultaneously affirmed the eurozone Country Ceiling for Cyprus at ‘AAA’.

The move brings Fitch into line with the other major ratings agencies, Moody’s and Standard & Poor’s, in pushing the Island’s credit rating into junk territory.

Cyprus is scrambling to find around €1.8 billion (about 10% of its GDP) by the end of the month to recapitalize the Island’s second largest lender, Cyprus Popular Bank.

In its statement the agency said that “Fitch acknowledges that its estimates of the losses and capital needs of Cypriot banks are subject to considerable uncertainty and are conservative. Nonetheless, in Fitch’s opinion, Cypriot banks will require substantial injections of capital in order to secure confidence in their financial viability”.

“Fitch judges that the scope for further capital-raising from the private sector is limited and thus assumes that the capital will have to be provided by the government”.

With the fiscal cost of bank support potentially as high as €6 billion, general government debt is likely to exceed 100% of GDP compared to the agency’s previous forecast of 88%.

Fitch expects the economy to stagnate this year and next and thereafter to recover only slowly as macroeconomic imbalances unwind and the headwinds from the on-going Eurozone and Greek crises persist.

The Negative Outlook primarily reflects the risks associated with a further worsening of the Eurozone crisis, notably further contagion from Greece.

“In the event of a Greek exit from the Eurozone, Fitch would review Cyprus’ sovereign ratings”, the agency said.

Adding that “Progress on deficit reduction, recapitalisation of the banking sector and reform to address medium-term challenges arising from an aging population and low productivity growth would support a stabilisation of the rating”.

Cypriot officials have said that they would seek foreign aid from fellow Eurozone nations or from Russia, or a combination of the two.

(According to a report by Bloomberg Neoklis Sylikiotis, the Island’s minister of commerce, industry and tourism, is visiting China to “explore the ground” for receiving a loan. The minister is in China with Dr Michael Sarris, chairman of Cyprus Popular Bank.)

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