DOW JONES NEWSWIRES
Fitch Ratings downgraded the Cyprus government's debt by three
notches Tuesday, saying the small nation's comparatively big
banking system is vulnerable to the debt crisis in nearby
Greece.
The downgrade on long-term debt to A- from AA- "reflects the
severity of the crisis in neighboring Greece and the risk this
poses for the Cypriot banking system and consequently the public
finances of Cyprus," Chris Pryce, director in Fitch's Sovereign
Group, said in a press release.
The agency removed the sovereign rating from negative watch.
The euro showed little reaction to the Fitch downgrade. It was
at $1.4380 at 0525 GMT, compared with $1.4375 before the news.
For the small economy with banking-system assets amounting to
nine times gross domestic product, Cyprus's Greek exposure "is a
significant source of vulnerability that has intensified with
successive downgrades of the Greek sovereign since January," Fitch
said. "Roughly one-third of the banking system's assets are booked
as Greek exposure."
The three major Cypriot banks--Bank of Cyprus, Marfin Popular
Bank and Hellenic Bank -- "are relatively well placed to absorb the
impact of a sovereign debt crisis in Greece that entailed an
assumed 50% haircut to face value of Greek government bonds," Fitch
said.
But in a more severe scenario, in which "non-performing loans
rose to 25%, Fitch estimates that the cost of recapitalizing the
banks could rise to 25% of GDP, necessitating more extensive
sovereign support." The government likely "would be willing and
able to provide effective support to Cypriot banks in a stress test
of this magnitude," but this "could materially alter the
government's debt profile in a manner that would be negative for
the sovereign ratings."
In the case of further difficulties, Fitch "believes that the
European Central Bank would provide liquidity support in such an
environment, thereby preserving financial stability in Cyprus."
-By William Mallard, Dow Jones Newswires; +65-6415-4031