10 January 2013

Moody's downgrades Cyprus's government bond ratings

Moody's Investors Service has today downgraded Cyprus's government bond rating to Caa3 from B3, and the outlook on the rating is negative. The rating action concludes the review for possible downgrade initiated on 16 November, 2012.

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. 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, although Moody's base case does not assume a default or distressed exchange in 2013.

The negative outlook assigned to the rating reflects Moody's view that the situation could significantly deteriorate over the next 12 to 18 months because of three factors: (1) ongoing liquidity concerns; (2) uncertainty about the exact size of the necessary bank recapitalisations, which may exceed the rating agency's current projections; and (3) uncertainty about the upcoming finalisation and signing of a Memorandum of Understanding (MoU) with the International Monetary Fund, the European Union and the European Central Bank, also collectively known as the Troika.

Press release

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