Weak bank­ing, NPLs, poor pub­lic fi­nances ham­per Cyprus sov­er­eign

Financial Mirror (Cyprus) - - FRONT PAGE -

A weak bank­ing sec­tor and slow re­cov­ery of non-per­form­ing loans, risks re­lated to pub­lic fi­nances and poorer house­holds con­tinue to im­pair Cyprus’s sov­er­eign cred­it­wor­thi­ness, Moody’s In­vestor Ser­vice said in a mar­ket re­port is­sued on Wed­nes­day.

De­spite re­cent en­cour­ag­ing state­ments from all other rat­ing agen­cies that the is­land’s near-bank­rupt econ­omy was on a path to re­cov­ery, Moody’s also does not see any “mean­ing­ful” re­cov­ery for another two years.

It said that the Caa3 rat­ing with a 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.

Moody’s said that that the main chal­lenge fac­ing the Cypriot au­thor­i­ties is help­ing the banks deal with their high per­cent­age of non-per­form­ing loans (NPLs), cur­rently at 45% of all loan port­fo­lios, one third of which rep­re­sent house­hold loans.

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 eco­nomic ad­just­ment 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 said that his­tor­i­cally high in­debt­ed­ness and de­creas­ing in­comes have stretched Cypriot house­holds’ cred­it­wor­thi­ness over the last few years, and whilst cost­com­pet­i­tive­ness 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”, 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 noted 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.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.