S&P sees "substantial and rising risk" of default for Cyprus

Standard & Poor’s said that Cyprus faces a “substantial and rising risk” of default on its public debt, especially if the Eurozone and the International Monetary Fund do not provide the necessary bailout.

Cyprus sought a bailout of nearly 17.5 bln, equal to its gross domestic product (GDP), of which about 5-8 bln euros will be earmarked to recapitalise the Cyprus banking system that has been exposed to Greek toxic government bonds and has reported huge losses because of their writedown.

The amount was estimated by global bond manager PIMCO and will not be revealed until a bailout programme has been agreed between the Cyprus government and its international lenders – the European Union, the European Central Bank and the International Monetary Fund – also known as the ‘Troika’.

The rating agency was quoted as saying that there is a one-in-three possibility of downgrading Cyprus yet again from CCC+ with negative outlook if a bailout from the European Rescue Mechanism and the IMF is not realised, making it even more impossible for the Cypriot government to find the necessary funds for the recapitalisation of the banks.

“We may even reduce the rating if we believe that the (Cypriot) authorities are unable to meet their obligations within a wider context of a rescue programme,” said S&P chief economist Moritz Kramer.

The Cyprus government needs about 7 bln euros to pay down its runaway public sector deficit and roll over upcoming treasury notes, and cannot afford to rescue the banks, especially when outgoing president Demetris Christofias agreed to an EU-imposed haircut of Greek government bonds, not realising that he could have sought an alternative to underwriting the Greek bonds by seeking recapitalisation directly from the European Central Bank rescue fund.