Moody's Investors Service downgraded Tuesday Cyprus' government bond ratings by one notch to Ba1 from Baa3, assigning a negative outlook to the ratings, citing increased risk for the government to provide financial aid to Cypriot banks due to their exposure to Greek bonds and the Greek economy.
Outlining the rationale behind its decision, Moody's cites ''the increased risk that the Cypriot government would have to provide renewed financial support to the country's banks because of their exposure to the Greek government and economy, and the commensurate impact of such measures on the government's own financial strength.''
It also cites ''the likely impact on market confidence in Cyprus stemming from these banking-sector concerns, as well as broader uncertainties about Europe's macroeconomic prospects and institutional frameworks.''
''Overall, the fragile market confidence in Cyprus, which has already led to a loss of access to international debt markets, is likely to continue, with a high potential for further shocks to funding conditions for the sovereign and the domestic banks,'' Moody's notes.
Moody's further notes that today's rating has been limited to one notch ''in acknowledgement of the positive developments in Cyprus since Moody's placed the country's rating on review for downgrade in November 2011.''
The agency points out that the Cypriot government has now passed a large-scale fiscal consolidation programme, which contains a greater number of structural changes to public-sector expenditure than had been anticipated, adding ''these measures are likely to enable the country to achieve a deficit reduction of around three percentage points of GDP in 2012.''
Furthermore, describing the recently presence of substantial gas reserves in the Cypriot Exclusive Economic Zone as a positive development, Moody's adds that ''although the government is likely to realise some one-off revenue gains from the sale of licenses to tap these gas reserves, it will probably take nearly a decade for the sovereign to realise the most significant and sustained benefits.''
Moody's is the second rating agency to downgrade Cypriot bonds to junk level after Standard and Poor's (BB+). Fitch's ratings has placed Cypriot bonds to BBB-.
