FOLLOWING Moody’s, ratings agency Standard and Poor’s has also downgraded Cyprus further into junk status citing “policy inertia” due to the presidential elections and faster than expected deterioration of the banks’ domestic loan books.
S&P said it lowered its long-term sovereign credit rating on the
Republic of Cyprus to 'B' from 'BB' while affirming its short-term sovereign credit rating at 'B'.
“The downgrade reflects our view that Cyprus' creditworthiness has deteriorated since the last downgrade on August 2, 2012, as the government has not yet negotiated a support package, while external and fiscal risks have risen,” S&P said. “We believe that electoral considerations ahead of the presidential poll … have contributed to policy inertia.”
S&P said this was in the face of a severe banking crisis, partly triggered by Cypriot banks'involvement in Greek debt restructuring in early 2012 but made worse by the deterioration in domestic lending books, and the government's fiscal inaction.
“We see only limited progress by the government in agreeing to a critical loan programme with the troika,” S&P said.
The long-term rating remains on CreditWatch negative, where it was initially placed on Aug. 1, 2012, the agency said. Other risks cited by S&P is the short average maturity of the government’s debt stock, which weakens its liquidity.
“For financing, the government relies heavily on the same distressed domestic banks it is obligated to recapitalise, in the absence of direct European Stability Mechanism (ESM) support for Cypriot banks,” S&P said.
At the same time the real economy is being hammered by deteriorating domestic credit conditions and eroding consumer and investor confidence.
“The banks' domestic loan books are deteriorating faster than we had originally anticipated, including those of Cyprus' 90 co-operatives.”
S&P suggested that Cyprus' commercial banks--or the government itself--could be forced to reschedule their debt in order to meet the terms of an official lending programme, which could reach upwards of €15 billion.
“It (debt) could reach 130 per cent of GDP by the end of 2013, the upper end of our July 2012 estimate,” S&P said.
The agency said the CreditWatch placement reflected its view of the potential for another downgrade if the island’s external and fiscal financing pressures escalated.
“We see at least a one-in-two chance that we could lower the rating again if official assistance is not forthcoming. We could also lower the ratings if we believe the government is not able to fulfill the conditions of a troika programme.”
However, the ratings could “stabilise at their current levels if we see that a programme is quickly concluded and if growth prospects, government debt, and external funding needs begin to stabilise.”