London, 13 June 2012 -- Moody's Investors Service has today downgraded Cyprus's government
bond ratings by two notches to Ba3 from Ba1, and has placed the
ratings on review for further possible downgrade.
The key driver for today's rating action is the material increase
in the likelihood of a Greek exit from the euro area, and the resulting
increase in the likely amount of support that the government may have
to extend to Cypriot banks. The two-notch downgrade reflects
Moody's assessment that this risk is exacerbated by the fact that
the country's finances are already strained and access to the international
markets is still denied.
Moody's decision to maintain Cyprus's sovereign bond ratings
on review for further downgrade reflects the need to assess the substantial
downside risks to the banking sector and the sovereign as a result of
a Greek euro exit. These risks have the potential to rise in the
aftermath of the Greek elections on 17 June 2012.
RATINGS RATIONALE
The key driver of Moody's two-notch downgrade of Cyprus's
government bond rating is the significant deterioration in the country's
outlook as a result of the material increase in the likelihood of a Greek
exit from the euro area. The immediate result is a further increase
in the likely amount of government support that the Cypriot banks may
require due to their exposure to the Greek government and economy as well
as the deterioration in domestic macroeconomic conditions.
Moody's prior Ba1 rating for Cyprus incorporated an assumption that
the Cypriot government would need to contribute capital support equivalent
to around 5-10% of GDP to the country's banks.
The rating agency now expects this to be materially higher. For
Cyprus Popular Bank alone, Moody's expects most, if
not all, of the €1.8 billion in recapitalisation costs
to be borne by the government, which will increase debt levels by
just over 10 percentage points of GDP.
Moody's has reflected the increased risks emanating from the increased
likelihood of a Greek exit in the ratings of the three largest Cypriot
banks, two of which were downgraded on 12 June 2012, with
all banks being placed on review for further downgrade. The close
linkage between the government and the banking sector means that these
increased risks for the banks may lead to much larger recapitalisation
costs to the government, and Moody's needs to reflect these
in the Cypriot sovereign's ratings.
FACTORS TO BE CONSIDERED IN THE REVIEW
The review will primarily focus on developments in Greece and how these
may translate into heightened risks for Cypriot banks' solvency
and liquidity, as well as any contingency measures that the banks
and the government of Cyprus may take to address these risks. The
political situation in Greece remains fluid and Moody's considers
that the risk of a Greek exit from the euro area may increase further
following the Greek parliamentary elections on 17 June.
As part of the review, Moody's will also assess any plan by
the government to seek external funding from the euro area to provide
liquidity support to the sovereign, much of which may be used to
provide systemic support to the banking sector. The extent of this
support and the conditionality that is attached to it would also be considered
in the review.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2008. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
two years preceding the credit rating action. Please see the special
report "Ancillary or other permissible services provided to entities
rated by MIS's EU credit rating agencies" on the ratings disclosure
page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Sarah Carlson
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Cyprus's government bond ratings to Ba3 from Ba1; on review for further downgrade
