PARIS (MNI) – Fitch Ratings has downgraded the long-term debt of
Cyprus, a member of the Eurozone, to A- from AA-, the agency said
Tuesday.
Fitch said the downgrade was due to the crisis in nearby Greece,
which threatens the banking system and public finances of Cyprus.
The Fitch statement is below:
“Fitch Ratings has downgraded the Republic of Cyprus’s Long-Term
Foreign and Local Currency Issuer Default Ratings (IDRs) to ‘A-‘ from
‘AA-‘ and removed them from Rating Watch Negative. The Outlook on the
Long-term IDRs is Negative. Fitch has simultaneously downgraded the
Short-Term Foreign Currency IDR to ‘F1′ from ‘F1+’. The Country Ceiling
has been affirmed at ‘AAA’, the ceiling appropriate for euro area
members.
“The downgrade reflects the severity of the crisis in neighbouring
Greece and the risk this poses for the Cypriot banking system and
consequently the public finances of Cyprus,” said Chris Pryce, Director
in Fitch’s Sovereign Group.
Cyprus is a small economy with a large banking system equivalent in
terms of assets to approximately nine times its GDP. Exposure to Greece
is a significant source of vulnerability that has intensified with
successive downgrades of the Greek sovereign since January 2011, when
Fitch put Cyprus on Rating Watch Negative citing fiscal and financial
sector risks. Roughly one third of the banking system’s assets are
booked as Greek exposure, including that of Greek subsidiaries based in
Cyprus. This exposure includes almost E14 billion of Greek sovereign
bonds and an estimated EUR5bn of Greek bank bonds. In addition,
Cypriot-owned banks have lent through their substantial networks in
Greece significant amounts to Greek companies and households.
Most Greek-related exposure is held by three major Cypriot banks:
Bank of Cyprus, Marfin Popular Bank and Hellenic Bank. Fitch believes
that these banks are relatively well placed to absorb the impact of a
sovereign debt crisis in Greece that entailed an assumed 50% haircut to
face value of Greek government bonds. The agency estimates that in this
scenario the cost of recapitalising the banks to a tier one capital
ratio of 10% would be of the order of E2 billion (11% of GDP), only part
of which might have to be met by the state. However, in a more severe
stress test, where a Greek sovereign default was associated with
significant deterioration in asset quality such that non-performing
loans rose to 25%, Fitch estimates that the cost of recapitalising the
banks could rise to 25% of GDP, necessitating more extensive sovereign
support.
Fitch believes that the Cypriot government would be willing and
able to provide effective support to Cypriot banks in a stress test of
this magnitude. At 61% of GDP Cypriot general government debt is not
high by euro area standards. However, the cost of providing financial
sector support could materially alter the government’s debt profile in a
manner that would be negative for the sovereign ratings. Fitch does not
rule out additional funding pressures arising for banks, including
subsidiaries of Greek banks. However, the agency believes that the
European Central Bank would provide liquidity support in such an
environment, thereby preserving financial stability in Cyprus.
Fitch says developments in Greece will continue to have an
important bearing on Cyprus’s ratings, underlining the importance of
sound public finances and a robust, well-capitalised banking system.”
[TOPICS: M$$EC$,M$X$$$,MT$$$$,MGX$$$,M$$CR$]
