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Moody’s upgrades Cyprus Caa3 govt bond to ‘positive’

23 March, 2014

Moody’s ratings agency has changed the outlook on the Cyprus Caa3 government bond rating to ‘positive’ from ‘negative’, as a result of the better-than-expected economic and fiscal performances of the country in 2103
At the same time Moody’s affirmed the island’s Caa3 rating, to reflect the still-elevated risk of Cyprus defaulting on its debt, or undergoing debt restructuring over the medium term.
Referring to the key drivers of the outlook change Moody’s cites firstly the stronger-than-expected fiscal and economic performances in 2013 and secondly the Cypriot authorities’ track record of meeting conditions under the Troika funding programme, which increases confidence that it will continue to benefit from this support.
At the same time, the affirmation of the Caa3 rating reflects Moody’s view of the persistent risks that remain to Cyprus’ public finances and their sustainability over the medium term as a result of significant uncertainties to the prospects for the macroeconomy and banking sector.
Moody’s has also raised the local and foreign-currency bond ceilings of Cyprus to Caa1 from Caa2, a move that reflects the reduced probability of exit from the eurozone.
The ratings agency notes that the Cypriot economy contracted by 5.4% in constant prices exceeding estimates from both Moody’s and the European Commission. As it points out, this, together with the implementation of fiscal-consolidation measures, is expected to have reduced the general government deficit to 5.4% of GDP in 2013 from 6.4% in 2012, according to Moody’s estimates.
More importantly, the agency believes that the primary deficit -- which nets out interest charges from the deficit -- has narrowed to an estimated 2.1% of GDP in 2013, from 3.3% in 2012.
In regards to the authorities` proven commitment to meeting conditions under the Troika funding programme, Moody’s comments that it is in part reflected in the Troika’s satisfactory assessments of the country’s Economic Adjustment Programme, the latest of which was issued on February 11.
Moody’s says that the government continues to meet the conditions of the programme, including the strengthening of the financial sector`s supervisory and regulatory framework, itself an important programme milestone.