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Moody’s, which kept the island’s banking system outlook on negative, said Cyprus was going through a deep and prolonged recession that will further strain the already highly stressed operating environment. “In this context the outlook reflects the formidable challenges facing the banks, namely acute asset-quality deterioration, continued concerns over their solvency, and intense funding and liquidity pressures”, Moody’s said.
The agency said it expected a 12 per cent contraction of GDP in 2013 and 6.4 per cent in 2014. “Under Moody’s central scenario, the Cypriot banks and cooperatives could face capital needs that exceed by some €1.5 billion the €2.5 billion of EU support funds earmarked for the banking sector”, Moody’s said. From that amount, €1.5 billion will be used to cover the capital shortfall of cooperative banks, leaving €1.0 billion as a cushion.
Moody’s also expects banks’ reliance on central bank funding, which totalled €11.3 billion in August, to rise further.