First rating test for the Cypriot economy on February 2

In early-February 2018, Moody’s rating agency will issue its first rating for the Cypriot economy, opening the way for a round of rating actions, estimated to mark the return of Cypriot junk-rated bonds back to investment-grade.

Burdened by an ailing oversized banking sector and an economic recession, Cyprus saw its ratings decline to junk in 2012, loosing access to financial markets, that forced the government to apply to the EU and the IMF for financial assistance in 2012. The government completed its €10 bailout programme in March 2016 and believes that 2018 will see its ratings return to investment-grade level.

In their rating actions in 2017, all rating agencies highlighted the need for maintaining fiscal discipline, the continuation of economic recovery, the reduction of the high public and private debt as well as the reduction of the high stock of non-performing loans burdening the banking sector, as the key drivers for further upgrades in 2018.

The return to the investment-grade category will compress Cyprus’ bonds yields further down, leading debt servicing costs further lower from the historic low levers achieved in 2017, while it will enable the inclusion of Cypriot bonds to the ECB bond-purchasing programme.

Moody’s, the first agency to issue a rating action for Cyprus on February 2, upgraded last July the Cypriot long term rating to Baa3, three notches below investment-grade assigning a positive outlook, which means that, barring a macroeconomic deterioration or a negative development in the banking sector, the agency will further upgrade the Cypriot rating.

The landmark action is expected in March 16 when Standard and Poor’s (S&Ps) will issue its own rating. S&P was the first agency to downgrade the Cypriot rating to junk in February 2012 and is believed to be the first agency to mark the return of the Cypriot ratings to investment-grade.

S&Ps on September 15 2017, affirmed the Cypriot rating to BB+, one notch below investment-grade, and assigned a positive outlook. This action prompted Harris Georgiades, Cyprus Minister of Finance, to state that “the revision of the outlook on Cyprus long-term credit rating to positive from stable by S&P, is the last step before Cyprus` return to investment grade.”

On its part, Fitch will issue its first rating action in 2018 on April 20. The agency upgraded the Cypriot rating in last October to BB (two notches below investment grade) also assigning a positive outlook.

DBRS will concluded the first round of rating actions on May 25. The Canadian agency was the last to issue a rating action in 2017, affirming its rating at BBlow (three notches below investment-grade), also assigning a positive outlook.

The second round of rating actions is expected to take place on July 27 by Moody’s, September 14 by S&Ps, October 19 (Fitch) and on 23 November by DBRS.