S&P downgrades Cyprus rating on economic concerns
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Xinhua, July 30, 2011
The rating agency Standard and Poor's on Friday cut Cyprus' credit rating from "A-" to "BBB+", citing the government's indecision in introducing substantial consolidation measures.
Standard and Poor's said in a press release that despite ongoing talks for the introduction of an economic package, "the Cypriot government will struggle to meet its general government deficit target of less than 4 percent of GDP at the end of 2011."
They also rated the short-term sovereign credit rating of Cyprus at "A-2".
The Cypriot government has not yet commented on the downgrading, the second this week.
Just two days ago Moody's also downgraded the Cyprus economy from A2 to Baa1 and on Thursday they also downgraded the island's two larger banks, the Bank of Cyprus and Marfin-Popular Bank, because of their exposure to the Greek debt.
Standards and Poor's said the inability of the government to cut down its deficit will increase its debt burden.
According to Standard and Poor's, such a substantial rise in general government debt is likely to reduce the Cypriot government's capacity to back-stop its domestic banking sector, considered to be vulnerable to the potential restructuring of government debt in Greece.
"We forecast the current account deficit at just below 7 percent of GDP at the end of 2011 (and possibly higher due to the impact of the explosion at Vasilikos power station on energy and capital imports) ," the agency said in reference to the destruction of Cyprus' main producing power station by a massive munitions explosion on July 11 which killed 13 people.
The rating agency said the fallout of the explosion and the destruction of the power station are bound to subtract from its original prediction of a 2 percent growth of the Cyprus economy, due to lower energy consumption and higher imports.
Standard and Poor's said the Cypriot banking system is well capitalized, but it warned that potential losses by Cypriot banks on their holdings of Greek sovereign and Greek bank debt may reduce current capital levels.
However, it predicted that the government will not need to recapitalize the banks in the near future, though this risk would increase by the ongoing uncertainty in the external environment.
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