International ratings agency Moody’s on Friday cut Cyprus’ credit grade by two notches to “Baa3,” or just above junk status, and warned of further downgrades because of the high likelihood that its heavily Greece-exposed banks will need state support next year.
Moody’s said in a statement that Cypriot banks’ losses would double under last month’s new European debt deal for Greece that would see banks write off 50 percent of the money the country owes them.
Those higher losses would make it more likely that the government would need to step in and provide a financial backstop of about 1 billion euros (US$1.38 billion), raising, in turn, the government debt-to-GDP ratio by 5 to 10 percentage points.
Cyprus’ top three banks hold an estimated 5 billion euros in Greek government bonds. Cypriot Finance Minister Kikis Kazamias said the island’s debt currently stands at about 65.5 percent of GDP.
Moody’s also cited the Cypriot government’s inability to borrow from international markets, which raises the possibility that authorities will need to seek emergency funding from official sources such as Europe’s bailout fund, known as the European Financial Stability Facility.
Rising interest rates on Cypriot bonds have made it increasingly difficult for the government to borrow from the secondary markets in order to finance the island’s debt and cover state costs.
Cyprus, a eurozone member since 2008 with a GDP of about 18.74 billion euros, has turned to Russia for a 2.5 billion euro loan agreement at a 4.5 percent annual interest rate, which is much lower than markets are currently offering.