13/01/2011 09:55
In an announcement released on Thursday, foreign credit rating agency, Moody’s Investors Service has today placed Cyprus's Aa3 local and foreign currency government bond ratings on review for possible downgrade, stressing that the government’s measures do not solve the structural fiscal problems of the country and expressing its concerns for the recent deterioration in the Cypriot government's fiscal metrics and the exposures to macroeconomic stress in Greece.
Cyprus's country ceilings for bonds and bank deposits are unaffected by the review and remain at Aaa (in line with the Eurozone's rating).
According to the report, “Moody's decision to initiate this review was prompted by (1) concerns that the recent deterioration in the Cypriot government's fiscal metrics is largely structural; (2) competitiveness issues; and (3) the banking sector's exposures to macroeconomic stress in Greece”.
Moody's says that the rating could be adjusted downwards by more than one notch, although the rating is likely to remain in the investment-grade A category.
“The severe impact of the financial crisis on Cyprus caused a deterioration in government finances that may prove very difficult to reverse," says Sarah Carlson, Vice President-Senior Analyst at Moody's Investors Service and lead sovereign analyst for Cyprus.
“While it is true that Cyprus's debt level is currently much lower than that of many other Eurozone countries, Moody's notes that it has risen very quickly and expect it to continue rising in the coming years”, the report said.
"While the Cypriot government has put forward a 2011 budget that appears to comply with its commitments under the EU's Excessive Deficit Procedure, its plans do not address the structural issues that may undermine the government's financial strength over the medium to long term," says Ms. Carlson.
Three factors to be considered in the review
In its review, Moody’s will focus on three factors:
Firstly, Moody's rating review will focus on Cyprus's ability to reverse the recent deterioration in the government's fiscal metrics and maintain this reduction over the medium to long term.
"Over the short term, the government may be able to meet the deficit reduction targets that it has agreed under the Excessive Deficit Procedure. However, given the structural rigidities of the state budget, maintaining these reductions over a number of years may be extremely challenging," says Ms. Carlson.
During this review, Moody's will be looking at the government's ability to address these rigidities -- particularly as they relate to the public sector payroll and social transfers.
Secondly, Moody's will also assess the country's ability to address competitiveness challenges. At the moment, the Cypriot government appears to have time to address these issues, but, in Moody's view, the challenges currently faced by several governments in the Eurozone periphery are a vivid reminder of how quickly these problems can become more immediate concerns.
Thirdly, the rating agency will focus on the Cypriot banking sector's exposures to Greece and the downward pressure they are exerting on the sovereign's rating.
Although reported capital and liquidity levels are not a source of major concern, the sector's large size relative to the size of the economy and its significant exposures to stressed macroeconomic conditions in Greece will also be a consideration in Moody's review.
The previous rating action on Cyprus was implemented on 3 January 2008, when Moody's upgraded the foreign and local currency government bond ratings of Cyprus to Aa3 with a stable outlook from A1 further to the country's entry to the Eurozone.
Cyprus's country ceilings for bonds and bank deposits are unaffected by the review and remain at Aaa (in line with the Eurozone's rating).
According to the report, “Moody's decision to initiate this review was prompted by (1) concerns that the recent deterioration in the Cypriot government's fiscal metrics is largely structural; (2) competitiveness issues; and (3) the banking sector's exposures to macroeconomic stress in Greece”.
Moody's says that the rating could be adjusted downwards by more than one notch, although the rating is likely to remain in the investment-grade A category.
“The severe impact of the financial crisis on Cyprus caused a deterioration in government finances that may prove very difficult to reverse," says Sarah Carlson, Vice President-Senior Analyst at Moody's Investors Service and lead sovereign analyst for Cyprus.
“While it is true that Cyprus's debt level is currently much lower than that of many other Eurozone countries, Moody's notes that it has risen very quickly and expect it to continue rising in the coming years”, the report said.
"While the Cypriot government has put forward a 2011 budget that appears to comply with its commitments under the EU's Excessive Deficit Procedure, its plans do not address the structural issues that may undermine the government's financial strength over the medium to long term," says Ms. Carlson.
Three factors to be considered in the review
In its review, Moody’s will focus on three factors:
Firstly, Moody's rating review will focus on Cyprus's ability to reverse the recent deterioration in the government's fiscal metrics and maintain this reduction over the medium to long term.
"Over the short term, the government may be able to meet the deficit reduction targets that it has agreed under the Excessive Deficit Procedure. However, given the structural rigidities of the state budget, maintaining these reductions over a number of years may be extremely challenging," says Ms. Carlson.
During this review, Moody's will be looking at the government's ability to address these rigidities -- particularly as they relate to the public sector payroll and social transfers.
Secondly, Moody's will also assess the country's ability to address competitiveness challenges. At the moment, the Cypriot government appears to have time to address these issues, but, in Moody's view, the challenges currently faced by several governments in the Eurozone periphery are a vivid reminder of how quickly these problems can become more immediate concerns.
Thirdly, the rating agency will focus on the Cypriot banking sector's exposures to Greece and the downward pressure they are exerting on the sovereign's rating.
Although reported capital and liquidity levels are not a source of major concern, the sector's large size relative to the size of the economy and its significant exposures to stressed macroeconomic conditions in Greece will also be a consideration in Moody's review.
The previous rating action on Cyprus was implemented on 3 January 2008, when Moody's upgraded the foreign and local currency government bond ratings of Cyprus to Aa3 with a stable outlook from A1 further to the country's entry to the Eurozone.
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