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Moody's assigns a B3 rating to Cyprus

30/07/2015 00:27
A report published on Wednesday by Moody's assigns a B3 rating to Cyprus government bonds.

The rating reflects the government's high debt burden and a large stock of non-performing loans in the Cypriot banking sector that limits banks' ability to support economic growth.

According to the report these factors are balanced by the external financial support Cyprus receives from the International Monetary Fund (IMF) and the European Stability Mechanism (ESM), as well as fiscal consolidation measures and structural reforms the country has implemented to revive the economy after a three-year recession.

"The Cypriot authorities' main challenge is to help the Cypriot banks to deal with their high percentage of non-performing loans, which stood at 47% of total loans," said Alpona Banerji, Vice President -- Senior Credit Officer, and a co-author of the report.

"While the Cypriot parliament has passed new laws that should support banks' ability to deal with these loans, we still expect the level of non-performing loans to fall only gradually."

Despite a third year of recession in 2014, private consumption recovered and made a positive contribution to growth following two negative years.

Moody's expects Cyprus's economy to stage a modest recovery in 2015 with growth of around 0.5%, mainly driven by a further recovery in private consumption and a positive contribution from net exports.

Further signs of economic improvement, progress in fiscal consolidation and reduced risks in the banking sector could lead to upward pressure on Cyprus' government bond rating.

Conversely, downward pressure could stem from any weakening in the government's commitment to restoring macroeconomic financial stability or if the expected return to economic growth -- even at low levels - fails to materialise. Evidence that the banking sector needs further recapitalisation could also put pressure on the rating.

Overall, Cyprus's fiscal performance under the programme set out by the Troika -- the European Central Bank, the European Commission and the International Monetary Fund -- has been strong and the government has outperformed targets. The debt-to-GDP ratio peaked at 107.5% in 2014 and Moody's expects debt to fall to around 90% by 2018.