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Moody’s: Cyprus banking sector risk ‘very high’

Moody’s Investor Services has warned about the dangers lurking in the Cyprus Banking system due to the high percentage of non-performing loans and considers the banking sector risk to be “Very High”.

Moody's Investor ServiceIN A REPORT issued today, Moody’s Investors Service says that Cyprus’s Caa3 rating (positive outlook) reflects the ongoing credit risks relating to the sustainability of the country’s public finances, as well as the resulting elevated risk of default in the medium-term.

The rating agency says that the main challenge facing the Cypriot authorities is helping the Cypriot banks deal with their high percentage of non-performing loans (NPLs) (system-wide average of 45%), one third of which represent household loans.

The rating agency’s report is an update to the markets and does not constitute a rating action.

On the fiscal side, the primary deficit has narrowed from 3.2% of GDP in 2012 to 2.0% of GDP in 2013, which is below the target set under the Troika’s Programme. In addition, the government recently improved its debt-amortisation profile by repaying early a bond due to mature in 2017, thanks to the proceeds raised from international markets.

However, Moody’s says that historically high indebtedness and decreasing incomes have stretched Cypriot households’ creditworthiness over the last few years, and whilst cost-competitiveness has improved, it has not translated into stronger export performance. As a result, Moody’s considers it unlikely that there will be any meaningful economic recovery before 2016. While the 2013 economic contraction was more benign than expected, the recession could be more protracted in the context of high unemployment, reduction in wages, erosion of savings, and the restructuring of the banking sector.

The national authorities and the Troika are currently addressing the challenge of how the country can help deal with the high percentage of NPLs within Cyprus’s banking system. Furthermore, Moody’s regards banking sector risk as Very High in Cyprus primarily because of the low baseline credit assessments assigned to rated banks in the system and also because of the significant size of the banking sector, as defined by total assets as a percentage of GDP, which stood at around 485% of GDP in May 2014.

Lastly, Moody’s notes that even though the restructuring process of the banking sector is under way, the actions that the authorities and the Troika have identified to lower the high NPL levels have not yet been fully implemented.

Moody’s Investors Service

Readers' comments

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  • John Richardson says:

    At some point, Cyprus will be forced to abandon the Euro; and when this happens Cyprus property will become exceptional value for money, since the new Cyprus pound will probably be devalued by as much as 50% against the Euro.

    The reasons why Cyprus will abandon the Euro, written by a former director of the IMF, can be found at WHY CYPRUS SHOULD LEAVE THE EURO

  • MartynG says:

    Hardly surprising that a globally recognised Investor Service should publicly note the amazingly high %ages of NPLs in this country – and also that despite recent government and public debate, no real guidelines – or Action! – has so far been determined/taken. So little surprise either that Moody’s are looking towards 2016 for a possible end, officially, to Recession. Given the very slow processes of decision-making and Action in this countryI it wouldn’t surprise me if officially the recession will drag on at least until 2018,

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