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Announcement:

Moody's: Cyprus's default risk remains elevated given weak growth prospects and high debt burden

Global Credit Research - 12 Jul 2013

London, 12 July 2013 -- In its annual credit report on Cyprus, Moody's Investors Service says that the country's risk of another default over the coming years remains elevated due to very substantial risks to the country's economic performance and, as a result, the government's finances. This is reflected in the negative outlook on the Caa3 rating of the government. Although it is not the rating agency's central scenario, Moody's sees a material risk of a Cypriot exit from the euro area, which is captured in the Caa2 country ceiling.

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

Moody's determines a country's sovereign rating by assessing it on the basis of four key factors -- economic strength, institutional strength, government financial strength and susceptibility to event risk -- as well as the interplay between them.

Moody's says that its low assessment of Cyprus's economic strength reflects the country's narrow economic base and weak growth prospects. The rating agency anticipates the resolution mechanism for the Cypriot banking sector will result in a significant downsizing of the activities of domestic banks, which will severely affect the economic performance of the island from 2013 onwards. Moreover, the recession and the extended economic restructuring will have a lasting and profound impact on investor sentiment and on Cyprus's attractiveness as a financial and business centre, which will overshadow its traditional competitive advantages over the coming years. In the absence of identified strong sources of growth, Moody's central scenario anticipates that the Cypriot economy will not return to positive growth before 2016. The rating agency also attach significant downside risks to this scenario. The possible exploitation of gas fields as well as a restoration of price and non-price competiveness in key export sectors carry some upside potential, but only over the long term.

Institutional strength is considered by Moody's to be low, reflecting significant deficiencies in the decision-making process, substantial shortcomings in the regulation and supervision of financial institutions, and passive fiscal-policy management. The significant delays observed in securing the Troika's financial assistance have, in Moody's view, exacerbated the precarious position of the country's financial sector, thereby increasing Cyprus's need for financial assistance. The rating agency's assessment is also supported by (1) the significant weaknesses identified by the European Commission with respect to the regulation of cooperative credit institutions and the supervision of credit risks in the banking sector; as well as (2) the poor track record of fiscal policy management, as highlighted by tax compliance concerns as well as forecasts that have proven to be overly optimistic.

Moody's assesses Cyprus's government financial strength as very low, given its already high debt burden and the substantial size of its projected fiscal needs. Immediate sovereign liquidity risks have been alleviated by the EUR10 billion funding programme that was agreed in April between the Cypriot government and the Troika, and the exchange of domestic sovereign debt (which Moody's considered to be a default). Nevertheless, the rating agency continues to believe that the sustainability of Cyprus's public finances is far from assured despite the measures taken in the fiscal, financial and economic domains (as required by the programme). In particular, the country's sharp economic recession, which is likely to be lengthy, underpins Moody's view that the government is highly likely to miss the programme's fiscal targets. This is likely to also perpetuate a negative feedback loop for the economy. Given the importance of public services, this may also challenge future consensus on fiscal strategy.

Moody's says that Cyprus's susceptibility to event risk is very high and mainly stems from the crystallisation of contingent liabilities as well as the country's capital control policy. Moody's still considers that there remain uncertainties regarding the magnitude of further recapitalisation needs for the financial sector given (1) the expected sharp deterioration in the operating environment which will erode asset quality; and (2) the behavioural responses of all economic actors to the shocks experienced by the financial sector, including the risk of financial disruption surrounding the timing and approach for lifting capital controls.

Moody's annual credit report on Cyprus is now available on www.moodys.com.

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NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Sarah Carlson
VP - Senior Credit Officer
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 Jan Sebastian 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: Cyprus's default risk remains elevated given weak growth prospects and high debt burden
No Related Data.

 

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