Moody's Cuts Cyprus Credit Rating by Two Notches
Moody's on Wednesday cut the credit rating of Cyprus by two notches, citing the nation's close links to Greece and the rising likelihood that Athens will exit the Eurozone.
Moody's Investors Service downgraded Cyprus's government bond ratings to Ba3 from Ba1, and 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."
The U.S. ratings agency said it had put Cyprus's sovereign bond ratings on review for further downgrade, saying it needs to assess Cyprus's "substantial downside risks to the banking sector and the sovereign as a result of a Greek euro exit."
Those risks have the potential to rise in the aftermath of the Greek parliamentary elections on Sunday, Moody's said. The vote could lead to the country's exit from the Eurozone, which would likely spark deep financial turmoil.
On Tuesday Moody's downgraded two Cyprus banks, citing their large exposure to a possible Greek euro exit.
With Cyprus increasingly seen as the next Eurozone candidate for a bailout after Spain, Moody's chopped its rating for Bank of Cyprus by one notch to B2 from B1, while Hellenic Bank's rating dropped to B1 from Ba3.
Cyprus Popular Bank, currently at B3 -- lower than the other two -- was placed on review for a possible downgrade.
Moody's said the three banks have large exposures to borrowers in Greece.
Cyprus Popular Bank has 42 percent of its net loans to Greek borrowers, Bank of Cyprus 34 percent of gross loans, and Hellenic Bank 17 percent of gross loans.
"As such, their capital positions remain susceptible to the direct and indirect consequences of a Greek exit," said Moody's.
Moody's said it views the chance of Greece's pullout from the Eurozone "as substantial" and that "the probability of such an outcome may increase further following the Greek parliamentary elections on 17 June."
Cyprus conceded last week that it may need a European Union bailout to save its banking system.
Cyprus has already secured a 2.5 billion euro ($3.2 billion) low-interest loan from Russia to cover its refinancing needs for this year.
The island's central bank governor said Wednesday that Cyprus could opt for a foreign loan instead of an EU bailout to deal with its crisis-hit economy if the terms are favorable.
Panicos Demetriades said the emphasis was on securing much needed funds to support a Greece-exposed banking system on terms that were the least painful.
"If possible entry to the EU support mechanism is only to do with the consolidation of the banking system, then I believe there will be no additional costs to the Cypriot taxpayer. I believe the same is valid for a bilateral loan," he added.
The government did not identify the country from which Cyprus is seeking a loan but China is thought to be in the frame.
Source: Agence France Presse
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