FITCH Ratings has downgraded the Cyprus Long-term foreign and local currency Issuer Default Rating (IDRs) two notches to ‘BB-‘ from ‘BB+’ pushing it further into junk territory.
In its statement Fitch said that its downgrade reflected the materially weaker macroeconomic outlook, a fiscal budget that has significantly underperformed expectations, and the continued high level of uncertainty over the costs associated with bank recapitalisation.
Fitch said that the three main Cypriot banks will need at least around a further €4 billion (22 per cent of GDP) in addition to the €1.8 billion already injected into Cyprus Popular Bank in 2012.
In addition, Fitch said that the government’s short-term financing flexibility had been materially reduced with its current dependence on bank financing to meet its funding needs.
The credit outlook remains negative.
Earlier this month the European Commission said that it expected the Cypriot economy to contract significantly in 2012 and that it will remain in recession for at least another two years as talks for a bailout from international creditors have dented sentiment and the country continues to feel the effects of the debt crisis in neighbouring Greece.