THE government said yesterday it could do little to avert further sovereign downgrades if ratings agencies continued to link the island’s economy with problems in indebted Greece, as the opposition piled on the criticism over the new setback.
Standard and Poor’s on Wednesday downgraded Cyprus one notch to A-, citing concern at the exposure of the island’s banks from a potential debt restructuring in Greece.
“Unfortunately right now foreign (credit rating) agencies see a possible problem in Greece, see a linkage between the two banking systems and have reached some conclusions, which are to a large extent beyond our control,” Finance Minister Charilaos
Stavrakis told reporters.
He was responding to a question on whether the government could take steps to avert a cycle of downgrades which started in November.
“Unfortunately, if the worst occurs in Greece it is very possible that they will not stop. Because foreign agencies unfortunately perceive the Cypriot and Greek banking systems as connected,” Stavrakis said.
“We do not agree with the view of Standard and Poor’s, but this is their position,” he said.
Wednesday’s rating cut was the second time Standard and Poor’s has lowered Cyprus’ ratings since November. It came a day after it chopped Greece’s ratings further into junk status to BB-, saying that a bailout scheme agreed by euro zone leaders last week increased the likelihood of Greek debt restructuring.
“We are confident the Greek government is taking all necessary measures to avert such a possibility,” Stavrakis said.
Moody’s in February cut Cyprus to A2, while Fitch, the only agency not to make a move so far, has placed Cyprus’s A rating on credit watch negative.
Standard and Poor’s said Cyprus ratings could be lowered further if there were an increase in the embedded credit risks in its financial system, either though a further deterioration of credit conditions in Greece or domestically.
The agency said it estimated the domestic system’s total exposure to Greece at about 1.7 times the island’s GDP. The economy was estimated to be worth €17.4 billion in 2010.
The largest component of the exposure, which according to central bank figures were €21.8 billion, were loans extended through Cypriot bank subsidiaries in Greece to Greek customers.
Cypriot banks’ exposure to Greek sovereign and bank debt amounted to about €6.4 billion, S&P said.
Opposition DISY said the string of downgrades have forced banks to raise their interest rates, something, which would ultimately burden households and businesses and affect the growth rate.
DISY deputy chairman Averof Neophytou said a 0.5 rise in interest rates would add some €112 million on domestic loans, currently at €22.5 billion.
“It is like the government raising the VAT on food and medicine from 5.0 to 12 per cent,” Neophytou said.
He said the government needed to recognise first that the economy, the market, small and medium businesses and households are facing problems.
And after recognising these “painful and nightmarish” realities, the government should stop talking “and come with a specific programme for a real recovery of the Cypriot economy.”
DIKO MP Nicolas Papadopoulos, whose party is part of the government, nominally at least, accused Stavrakis of denying his responsibility and passing the buck.
“Mr Stavrakis ignores the fact that the (European) Commission, the Central Bank Governor, all the rating agencies and the majority of parties have repeatedly stressed the urgency of cutting state expenditure and overlooks the fact that the downgrade is due to the bad state of public finances,” Papadopoulos said.
