Cyprus downgraded on Greek debt exposure
by Daniel Mason
28 October 2011
Cyprus has had its credit rating downgraded by Standard & Poor's because of its exposure to Greek debt – and its score could be lowered further unless the government pushes through next year's budget without backtracking on fiscal consolidation measures.
The Mediterranean island's long-term rating was cut from BBB+ to BBB and placed on CreditWatch negative, while the country's short-term rating was also lowered. Cyprus has in recent months suffered downgrades by both the other big rating agencies, Moody's and Fitch.
In a statement, S&P said that a Greek government default could "reverberate through Cyprus' economy in the form of private sector funding costs increasing beyond our expectations, thereby reducing investment and overall domestic demand". It warned that low growth might "reduce the willingness of politicians" to complete reforms.
Cyprus has an estimated exposure to Greek sovereign, corporate and bank debt of 165 per cent of its gross domestic product. At yesterday's summit, eurozone leaders agreed that banks would voluntarily take a 50 per cent haircut on Greek loans – and this could force Cyprus' banks to turn to public sources for recapitalisation.
The rating agency added that it expected GDP growth to remain flat until 2013 and said it was "unclear" that fiscal consolidation measures would be implemented because of opposition from organised labour. The government has put in place austerity measures amounting to €104m this year and €262m in 2012 – still short of the numbers required to meet deficit reduction targets of 5.5 per cent in 2011 and 2.2 per cent next year. The government has since revised those targets upwards, but S&P noted that "no new measures have been implemented".
As a result, S&P said it estimated the deficit would hit 7 per cent in 2011 and 4 per cent in 2012. Because of its precarious position Cyprus is "likely" to accept a €2.4bn bilateral bail-out on the table from Russia – but these "important but temporary revenues would not structurally improve Cyprus' public finances".
In addition S&P noted "heightened tensions in the eastern Mediterranean" with Turkey over the exploration of potential natural gas reserves. These tensions were included in the ratings review but any discovery of gas reserves was not because extraction would take place beyond the rating agency's three-year time scale.
The Mediterranean island's long-term rating was cut from BBB+ to BBB and placed on CreditWatch negative, while the country's short-term rating was also lowered. Cyprus has in recent months suffered downgrades by both the other big rating agencies, Moody's and Fitch.
In a statement, S&P said that a Greek government default could "reverberate through Cyprus' economy in the form of private sector funding costs increasing beyond our expectations, thereby reducing investment and overall domestic demand". It warned that low growth might "reduce the willingness of politicians" to complete reforms.
Cyprus has an estimated exposure to Greek sovereign, corporate and bank debt of 165 per cent of its gross domestic product. At yesterday's summit, eurozone leaders agreed that banks would voluntarily take a 50 per cent haircut on Greek loans – and this could force Cyprus' banks to turn to public sources for recapitalisation.
The rating agency added that it expected GDP growth to remain flat until 2013 and said it was "unclear" that fiscal consolidation measures would be implemented because of opposition from organised labour. The government has put in place austerity measures amounting to €104m this year and €262m in 2012 – still short of the numbers required to meet deficit reduction targets of 5.5 per cent in 2011 and 2.2 per cent next year. The government has since revised those targets upwards, but S&P noted that "no new measures have been implemented".
As a result, S&P said it estimated the deficit would hit 7 per cent in 2011 and 4 per cent in 2012. Because of its precarious position Cyprus is "likely" to accept a €2.4bn bilateral bail-out on the table from Russia – but these "important but temporary revenues would not structurally improve Cyprus' public finances".
In addition S&P noted "heightened tensions in the eastern Mediterranean" with Turkey over the exploration of potential natural gas reserves. These tensions were included in the ratings review but any discovery of gas reserves was not because extraction would take place beyond the rating agency's three-year time scale.
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