Moody’s up­grades Cyprus bonds from Caa3 to B3

Financial Mirror (Cyprus) - - FRONT PAGE -

Moody’s In­vestors Ser­vice has up­graded the Cyprus gov­ern­ment bond rat­ing to B3 from Caa3 and the out­look to ‘sta­ble’ from ‘pos­i­tive’ on progress in ad­dress­ing the coun­try’s key chal­lenges with re­spect to macroe­co­nomic sta­bil­ity, fis­cal con­sol­i­da­tion and bank­ing sec­tor sta­bil­ity.

Moody’s be­lieves that Cyprus re­mains in a sim­i­lar po­si­tion to other de­faulted sov­er­eigns. The un­der­ly­ing prob­lems that led to the coun­try’s ini­tial de­fault are not yet fully re­solved and the like­li­hood of re­de­fault will re­main el­e­vated for a sus­tained pe­riod of time, with no fore­cast of a sub­stan­tial eco­nomic re­cov­ery be­fore 2016.

The rat­ing agency said that the up­grade re­flects two key driv­ers:

1) The con­sol­i­da­tion of the gov­ern­ment’s fis­cal po­si­tion, as il­lus­trated by an ex­pected re­turn to a pri­mary bud­get sur­plus from 2014, and the ex­pec­ta­tion that pub­lic debt rel­a­tive to GDP will level off in 2015.

2) The sta­bil­i­sa­tion of Cyprus’s fi­nan­cial sec­tor through the re­cap­i­tal­i­sa­tion of trou­bled banks, which, to some ex­tent, low­ers the risk that bank-re­lated con­tin­gent li­a­bil­i­ties will crys­tallise on the gov­ern­ment’s bal­ance sheet.

How­ever, Moody’s warned in its lat­est up­grade that the Cyprus gov­ern­ment bond rat­ing re­mains con­strained by sub­stan­tial credit chal­lenges, in­clud­ing a weak eco­nomic out­look and the very high and still ris­ing non-per­form­ing loans (NPLs) in the bank­ing sec­tor, which gen­er­ate fur­ther neg­a­tive risks to the gov­ern­ment’s bal­ance sheet.

Con­cur­rently, Moody’s on Fri­day raised the bond ceil­ings to B1/NP from Caa1/NP, and the de­posit ceil­ing to Caa1/NP from of the fi­nan­cial sec­tor with the banks’ bal­ance sheets bol­stered through in­creased cap­i­tal buf­fers, ex­ter­nal delever­ag­ing (through sales of non-core ac­tiv­i­ties over­seas) and im­prove­ments in their fund­ing pro­files. As a con­se­quence, the sov­er­eign’s sus­cep­ti­bil­ity to shocks em­a­nat­ing from the bank­ing sec­tor has de­creased to some ex­tent.

The rat­ing agency also notes that the au­thor­i­ties have strength­ened the reg­u­la­tory and su­per­vi­sory frame­work, in par­tic­u­lar by im­ple­ment­ing mea­sures in­tended to aid banks in deal­ing with their high NPLs, for in­stance through the re­form of loan fore­clo­sure pro­ce­dures as set out in a law en­acted on 6 Septem­ber and that was re­cently en­forced by the Supreme Court as it ruled out amend­ments aimed at di­min­ish­ing this law.

Look­ing ahead, Moody’s said up­ward pres­sure to the gov­ern­ment bond rat­ing could re­sult from fur­ther fis­cal progress un­der the Troika pro­gramme, e.g. if the gov­ern­ment’s pri­mary sur­plus were to ex­ceed tar­gets and reach 4% ear­lier than planned (i.e. be­fore 2018). In ad­di­tion, ev­i­dence that the risks to growth and to the bank­ing sec­tor are un­likely to crys­tallise would im­ply up­ward pres­sure: higher eco­nomic growth and/or a more rapid re­ver­sal in the up­ward trend for banks’ NPLs would be credit pos­i­tive.

Con­versely, down­ward pres­sure could emerge if the gov­ern­ment’s com­mit­ment to meet­ing the Troika pro­gramme’s con­di­tion­al­ity and restor­ing macro-fi­nan­cial sta­bil­ity were to weaken, in par­tic­u­lar if the ex­pected low re­sump­tion of growth fails to ma­te­ri­alise.

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