MOODY’S Investors Service announced yesterday that it had placed Cyprus on review for a possible downgrade.
The rating agency said that negotiations with the Troika could potentially be prolonged raising further liquidity risks.
It reported that that politically controversial measures such as significant changes in the structure of public expenditures (like the linkage between public-sector wages and inflation) and privatisations are high priorities for the Troika.
Even if negotiations were to be concluded in 2012, Moody’s considers it unlikely that any bailout money will be sent in 2012 because of the length of time that it takes for euro area national parliaments to agree to any new assistance programme. Moreover, the country’s political and election calendar, in particular the Cyprus presidential election due on 17 February 2013, materially raises the risk of a delay in agreeing the conditionality and disbursement of bailout money until late in the first quarter of 2013.
Moody’s said that Cyprus’ rating could be downgraded if there is evidence that the government’s access to short-term funding would be insufficient to meet its needs – or if it fails to reach an agreement with the Troika in a timely fashion.
The rating agency added that a second factor for its review was signs that Cyprus’ budget deficit will be significantly larger than expected. The magnitude of the government’s fiscal challenge is unlikely to decline materially even following agreement on an agreement with Troika because of the sheer size of the financial support needed for the banking sector.