February 26, 2021

Moody’s Downgrades Cyprus Over Economic Woes

LONDON — In the latest downgrade to hit a euro-zone country, Cyprus had its credit rating cut by Moody’s Investor Service on Wednesday because of its banking exposure to Greece, political jostling and recent disruptions to the country’s power supply.

Moody’s cut the country’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 also cut the country’s short-term ratings.

An explosion at a naval base earlier this month badly damaged the Vasilikos power plant, which supplies about half of the country’s power generation capacity. That has caused regular power outages, and Moody’s said in a statement that the power shortage is likely to hurt the economy, which it now expects to stagnate this year, and expand only 1 percent next year.

The rating agency 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” as a reason for the downgrade.

Cyprus bonds fell on Wednesday and Italian and Spanish bonds also dropped as investors became increasingly concerned whether an aid package assembled this month 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.

The ratings agency 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, Moody’s 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 various 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.

Article source: http://feeds.nytimes.com/click.phdo?i=e0715796354b9376bacefb2e22853727

Speak Your Mind