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Fitch cuts Cyprus sovereign credit rating to ‘B’

Ratings agency Fitch has downgraded the Republic of Cyprus’ sovereign credit rating two notches on its belief that it may cost the government more to bailout the island’s banking sector than previously anticipated.

FITCH RATINGS has cut the Cyprus sovereign credit rating two notches to ‘B’ from ‘BB-minus’ amid concerns that the government’s support for the islands troubled banks could cost more than previously thought.

In a statement issued last evening, Fitch said that “Uncertainty regarding the capital needs of the cooperative banks still remains. Including the latter, the total recapitalization costs of the banking sector could be up to €10 billion, although Fitch anticipates that this figure may include a degree of headroom.”

That would push the size of the rescue package that Cyprus is trying to finalize with the other 16 European Union countries that use the Euro and the International Monetary Fund to over €17 billion.

The credit outlook on the government remains negative. Fitch said this is a reflection of “continued policy uncertainty” over a financial bailout package being prepared with the Eurozone.

According to Fitch, that would drive the country’s debt load to over 140 per cent of its annual gross domestic product, 20 percentage points more than the agency had previously estimated.

Fitch also notes that: “Negotiations between the Troika and the authorities have been protracted and are still on-going, with lingering uncertainty about the timing and details of an EU-IMF rescue programme.”

Outgoing Euro Group President Jean-Claude Juncker has said that a March decision on the bailout is possible.

Government spokesman Stephanos Stephanou said that the new downgrade proves once again that the banks’ recapitalisation is the root of the problems behind the island’s ailing economy.

The draft Memorandum of Understanding between Cyprus and international lenders on the state of the island’s banking sector notes that: “many of the problems for the sector are home-grown and relate to over expansion in the property market as consequence of banks’ poor risk management practices.”

Readers' comments

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  • Steve says:

    It is worrying that the government is more concerned with avoiding the blame for Cyprus’s financial problems than it is with fixing the problems. This is typical of Russian-style communist tactics and the lesson to Cyprus voters is to understand what you are voting for.

    With regard to the bailout, it has obviously not occurred to the government that while most EU countries are too large in monetary terms to be allowed to fail, Cyprus is the flea on the back of the elephant and while the president pontificates about what he will and will not accept as conditions, he is alienating the very people who will decide whether or not to rescue Cyprus.

    If a decision is only possible (not even likely?) in March, then what will happen regarding the government’s undertakings made when they borrowed millions from the pension funds of the state-owned entities in December to pay civil servants’ salaries?

  • The views expressed in readers' comments are not necessarily shared by the Cyprus Property News.

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