Cyprus Rating Cut by S&P on Banks’ Exposure to Greek Debt

Cyprus’s credit rating was cut by Standard & Poor’s on concerns that the island’s banks will face bigger losses from Greece’s new debt-swap deal and that the Cypriot government is delaying measures to improve its finances.

S&P lowered the eastern Mediterranean island’s long-term sovereign credit rating to BBB from BBB+ and said it may cut it further, according to an e-mailed statement today. The short-term rating was cut to A-3 from A-2.

With greater private-sector involvement “now envisioned for a Greek government debt restructuring and with uncertainty in equity markets, Cyprus’s domestic banks may, in our opinion, turn to official sources for fresh capital to maintain market confidence,” London-based S&P analyst Frank Gill said in the statement. Cypriot banks’ exposure to Greek sovereign, corporate and bank debt stands at about 165 percent of the island’s gross domestic product, Gill said.

European leaders agreed on the outlines of a new bond-exchange plan early today after marathon negotiations on how to provide more aid for Greece and increase the European Union’s crisis-fighting resources. Private investors who take part will exchange their existing Greek bonds for new ones at 50 percent of face value.

‘Debt Dynamics’

The new debt exchange may lead to the need to recapitalize Cypriot lenders “through a public offering or a government capital injection,” S&P said. “Weaker economic growth could worsen the Cypriot government’s debt dynamics and reduce the willingness of its political leaders to press forward with fiscal and labor-market reforms.”

The Cypriot government aims to reduce the budget deficit to 5.5 percent of GDP this year from 6.5 percent of GDP in 2010. Lawmakers approved a 220 million-euro ($313 million) austerity package in August, which included public-sector wage cuts and higher taxes in a bid to prevent borrowing costs from rising.

Cyprus’s government is aware of the challenges facing the economy and moving quickly to take all necessary measures, the Nicosia-based Finance Ministry said in an e-mailed statement after the downgrade.

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