CYPRUS came in for a hammering last night as ratings agency Moody’s chopped its view of the country, bringing it down from Ba3 to B3 – a three notch plunge.
The agency also gave a negative outlook to the ratings, suggesting they might fall yet further, citing “profound difficulties in the Cypriot banking sector”.
These difficulties – which have seen some 18 per cent of loans moving into arrears – could threaten public finances, as they are likely to need government support if they are to survive, Moody’s says.
And shocks to banking are likely to constrain the rest of the economy, through restricted lending growth, threatening the government budget from the revenues side of the equation.
The three largest Cypriot banks would need €8bn (£6.5bn) to replenish their core tier one capital to 10 per cent, it says, which is some 47 per cent of GDP.
This recapitalisation would bring Cyprus’s debt to GDP ratio up to around 140 per cent of GDP, the firm says, “one of the highest in Moody’s rating universe”.
Moody’s was particularly worried about the lack of an agreement between Cyprus and the so-called troika, made up of EU, IMF and European Central Bank representatives, on terms of a bailout to enable the mediterranean country to continue paying its debts.
The possibility of a Greek exit from the single currency was also a cause for concern. “The sovereign’s credit strength would be greatly challenged if Greece were to exit the euro area, because of the severe impact it would have on Cypriot banks and more generally on the nationally economy,” the announcement read.