No mercy as Moody’s slashes bond rating

MOODY’S ratings agency has downgraded Cyprus’ bond rating by three notches to Caa3 from B3 with a negative outlook on the significantly increased likelihood of a government default due to a rising debt burden.
The key driver of the rating action “is the anticipated rise in the Cypriot government’s debt burden, driven principally by the increased recapitalisation needs of its banking system following distressed exchanges on Greek government debt and rising delinquencies on loans to Greek and Cypriot obligors,” Moody’s said. “Given that the resulting increase in the debt burden is likely to be unsustainable, Moody’s believes there is a significantly increased likelihood that the Cypriot government may eventually default outright or press for a distressed exchange.”
The agency added however that it did not expect a default or distressed exchange in 2013.
Reacting on Friday to the Moody’s downgrade, Finance Minister Vassos Shiarly said he wanted to focus on the positive, adding that he looked forward to the conclusion of a bailout deal.
“A conclusion on a memorandum of understanding does improve the prospects,” he told state radio. Asked about the rating action, he said: “We are not at all happy about it.”
The agency said its updated stress test analysis suggested that the recapitalisation cost for the three largest banks was higher than originally anticipated which, when combined with the likely needs of the cooperative sector, translates into a bank recapitalisation cost of about €10 billion, which equates to over 50 per cent of GDP.
Moody’s said its current estimates of the capital needs of the Cypriot financial sector were likely to push the sovereign’s debt-to-GDP ratio to 150 per cent in 2013 — one of the highest levels in Moody’s rating universe.
“More importantly, Moody’s believes that these debt levels could continue to rise to above 154 per cent by 2015 in view of the uncertainties regarding the cost of recapitalising the banks and the implementation risks facing the country’s fiscal consolidation plan given the uncertain depth and length of the economic downturn,” the agency said. “This upward adjustment in Moody’s forecast for Cyprus’ debt levels has in turn led to an assessment of a heightened probability of default, given that debt levels of this magnitude are unlikely to be sustainable for a small country with very weak expected nominal GDP growth.”

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