Another EU member country has been downgraded by a ratings agency. This time, Standard and Poor’s cut Cyprus’ long-term credit rating by one notch from BBB+ to BBB.
Cyprus has had its credit rating cut by all three major ratings agencies in the past few months.
The ratings agency cited the large exposure of Cyprus banks to sovereign Greek debt. The ratings agency estimates exposure to total Greek debt to be around 165 percent of national output.
European Union leaders at the EU Summit came to an agreement in which banks would take a 50 percent loss on their holdings of Greek government debt as part of a broad Greek restructuring.
As a result Cyprus banks would require recapitalization and the cost of injecting new capital into the banking system could amount to 10 percent of gross domestic product.
“We believe that a Greek default scenario with private-sector involvement, or haircuts, higher than previously agreed by commercial creditors would necessitate the recapitalization of some domestic banking institutions” in Cyprus, said.
As a result, a Greek default “could reverberate through Cyprus’ economy,” the ratings agency said, putting pressure on government finances and raise the cost of borrowing in the private sector, reducing investment and overall demand.
Resulting weaker growth would “worsen the Cypriot government’s debt dynamics and reduce the willingness of its political leaders to press forward with fiscal and labour market reforms,” S&P added.
In addition to its Greek debt exposure, Cyprus debt problems were worsened by a huge munitions blast that destroyed the island’s largest power station in July.
S&P put Cyprus’ long-term credit rating remained on review for a possible further downgrade. It also cut its short-term rating to A-3 from A-2, but removed it from negative credit watch.
The Cypriot Finance Ministry, in a prepared statement, said “the government acknowledges the challenges” Europe’s debt crisis presents and “plans to take decisive and swift action for fiscal consolidation and administering challenges in its banking sector in cooperation with the Cypriot Central Bank.”
Government officials say a 2.5 billion euro loan from Russia will help refinance maturing debt next year.