Fitch downgrades Cyprus…again!

Fitch Ratings has downgraded the Republic of Cyprus's long-term foreign and local currency Issuer Default Rating (IDRs) to 'B' from 'BB-', with the short-term IDR affirmed at 'B' and the outlook on the long-term IDRs at ‘negative’.
The downgrade partially reflects the agency's view that the size of the government support to the banking sector is likely to be higher than previous Fitch estimates, which mainly focused on the three largest banks.
Uncertainty regarding the capital needs of the cooperative banks remains. Including the latter, the total recapitalisation costs of the banking sector could be up to EUR 10 bln, although Fitch anticipates that this figure may include a degree of headroom. If fully realised it would increase the size of the necessary official support programme for the Cypriot sovereign to over EUR 17 bln. In this scenario, Fitch forecasts that government debt to GDP would jump to over 140% in 2013. This is significantly higher than Fitch's previous estimate of peak debt of 120% of GDP and materially lowers the creditworthiness of the sovereign.
“Negotiations between the Troika and the authorities have been protracted and are still ongoing, with lingering uncertainty about the timing and details of an EU-IMF rescue programme,” Fitch said in an announcement.
“While agreement has been reached on the size and type of the fiscal adjustment, disagreements remain on the potential privatisation of state owned enterprises and the bank recapitalisation costs. The latter, combined with the uncertainty over prospects for fiscal consolidation and the depth and duration of the economic recession, also increase uncertainty over the long run trajectory of public finances,” the rating agency concluded.