LONDON — In the latest downgrades to hit the euro zone, Greece had its credit rating cut by Standard Poor’s on Wednesday, while Moody’s Investors Service cut the rating for Cyprus.
S.P.’s rating for Greece, already in junk territory, was reduced two notches to CC with a negative outlook. In a statement, S.P. said that the proposed restructuring of Greek government debt as part of a second bailout was a selective default — a prospect ratings agencies had warned about when the plan was being discussed.
S.P. also said that despite the new aid package agreed on last week, there was still a good chance that Greece would default on its debt.
Under the second bailout, banks and other private investors are to contribute about €50 billion, or $72 billion, by swapping their existing debt for new bonds..
“Standard Poor’s has concluded that the proposed restructuring of Greek government debt would amount to a selective default under our rating methodology,” the agency said. “We view the proposed restructuring as a ‘distressed exchange’ because, based on public statements by European policymakers, it is likely to result in losses for commercial creditors.”
Moody’s cut Cyprus’s long-term government bond rating two levels to Baa1 — still an investment grade — from A2. It assigned a negative outlook, signaling the next move may be another downgrade, and cut its short-term ratings.
An explosion at a naval base this month badly damaged the Vasilikos power plant. That has caused outages, and Moody’s said that the shortage is likely to hurt the economy, which it now expects to stagnate this year, and expand only 1 percent next year.
Moody’s also cited the “increasingly fractious domestic political climate” and “the material risk that at least some Cypriot banks will require state support over the medium term as a result of their exposure to Greece.”
Cyprus bonds fell on Wednesday and Italian and Spanish bonds dropped as investors became increasingly concerned whether a package assembled by European leaders to help Greece’s troubled finances and restore confidence in the euro zone would be enough. The yield on Cyprus’s 10-year bond rose 0.13 percentage points to 10.043 percent.
Banks in Cyprus continue to hold “substantial” Greek debt and would be affected in the case of a sovereign debt default, Moody’s said.
Moody’s also said it was concerned about the large role the banking sector plays in the Cypriot economy. Bank assets amount to about 600 percent of gross domestic product in Cyprus, excluding foreign bank subsidiaries, it said.
The July 11 explosion that destroyed the plant and killed 13 people also rattled the government. Costas Papacostas, the defense minister, and Petros Tsalikidis, chief of the national guard, resigned amid criticism about failing to take steps that could have prevented the accident. Some 98 gunpowder containers were left stacked for more than two years in an open field near the power station.
The political friction might make it harder for the center-left government, which does not have an absolute majority in Parliament, to push through spending cuts and privatizations announced on July 1.
“This adverse development increases implementation risk to the government’s plans, many of which will require not just cross-party support but also acceptance by the trade unions,” Moody’s said.
On Tuesday, a number of parties accused the government of backtracking because they feared an angry backlash from Cyprus’s powerful labor unions, Reuters reported from Nicosia.
Cyprus, which adopted the euro on Jan. 1, 2008, is seeking to bring down a budget deficit that hit 5.3 percent of gross domestic product last year.
“The Cypriot banks have been considered safer than the Greek banks and have received a lot of the deposit outflow from Greece,” Panicos Demetriades, a professor at the University of Leicester, said, adding that the banks have large businesses in Russia. “However, the problem is that a small country like Cyprus cannot afford to support such a large banking system, if it gets into trouble.”
Article source: http://www.nytimes.com/2011/07/28/business/global/moodys-downgrades-cyprus-over-economic-woes.html?partner=rss&emc=rss
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