Cyprus Says Moody’s Outlook Change Is a Sign It’s on Right Track

Moody’s Investors Service’s positive outlook on Cyprus’s credit rating “is an indication that we are on the right track,” said Christos Patsalides, permanent secretary of the Cypriot Ministry of Finance.

The ratings company cited Cyprus’s performance in meeting the conditions of its international bailout as a reason for raising its outlook to positive from negative two days ago. “This is an important development even though we are in the early stages of implementing the economic adjustment program,” Patsalides said in a phone interview in Nicosia yesterday.

Cyprus’s rating remained nine steps below investment grade at Caa3, New-York based Moody’s said in a statement. “The affirmation of the Caa3 rating reflects Moody’s view of the persistent risks that remain to Cyprus’s public finances and their sustainability over the medium term as a result of significant uncertainties to the prospects for the macroeconomy and banking sector,” the rating company said.

Cyprus received a 10 billion-euro ($13.8 billion) bailout from the euro area and International Monetary Fund in March last year to avoid a financial collapse. A review by its creditors last month concluded that the country’s fiscal performance since then was better than expected. It still faces “significant risk” arising from its banks’ high proportion of loans in arrears, the so-called troika of officials from the European Commission, European Central Bank and the IMF said.

Austerity Measures

“Cyprus is committed to continue implementing the program,” which includes austerity measures, sales of public assets, measures for the stabilization of its banking system and changes in public administration and the social security system, Patsalides said.

“Fiscal-consolidation measures implemented this past year should have, for the most part, permanent positive fiscal effects,” according to Moody’s.

Standard & Poor’s rates Cyprus B-, which is six levels below the junk threshold.

In almost half the instances, yields on government bonds fall when a rating action by Moody’s and S&P suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. When S&P downgraded the U.S. government in August 2011, bonds rose and pushed Treasury yields to record lows.

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