Standard & Poor’s (S&P) said it lowered its credit rating on the long-term sovereign credit of Cyprus on Friday to “BBB+” from “A-” and affirmed the short-term “A-2” rating, based on concern over the country’s economy and budget.
It said the outlook for the ratings remains negative.
The move comes two days after Moody’s Investors Service cut its rating on Cypriot sovereign debt and a day after it lowered the ratings on two of the island’s major commercial lenders — Marfin Popular Bank and Bank of Cyprus.
“Despite ongoing talks about substantial consolidation measures, we believe the Cypriot government will struggle to meet its 2011 general government deficit target of less than 4 percent of GDP, and its 2012 target of 2 percent. This, in turn, will likely increase the government’s debt burden, which we currently expect will be 80 percent of GDP at the end of 2011,” S&P said.
“Such a substantial rise in -general government debt is likely to reduce the Cypriot government’s capacity to back-stop its domestic banking sector, which in our view is vulnerable to the potential restructuring of government debt in Greece,” it added.
The latest negative outlook follows the resignation on Thursday of the entire Cabinet of Cypriot President Dimitris Christofias, under fire after a munitions blast killed 13 people and wrecked the island’s main power plant.
S&P said that between 2008 and last year, the budgetary position shifted from a surplus of just under 1 percent of GDP to a deficit of 5.3 percent.
“Government personnel expenditures continue to make up a high proportion of total spending,” at 25 percent, and “prospects for passing personnel and benefit cuts through parliament are uncertain, however, not least due to the influence of public sector unions.”
“Reforms aimed at introducing public-sector workers’ contributions to their pensions and increasing the age of retirement are also facing delays,” S&P said.
Enlarging on the Greek question, S&P said the “Cypriot banking sector’s loans to Greek customers and holdings of Greek sovereign and bank debt are on their own equivalent to more than 160 percent of Cyprus’ GDP.
“Although the Cypriot banking system is, in our view, well capitalized, we anticipate that potential losses by Cypriot banks on their holdings of Greek sovereign and Greek bank debt may reduce current capital levels,” S&P said.
“Our baseline expectation is that the Cypriot government will not need to recapitalize the banks in the near future, but the ongoing uncertainty in the external environment increases the risk of this eventuality.” It added.
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