S&P: Cyprus credit rating, outlook unaffected by election outcome

“In our view, Cyprus receiving short-term financing and a bail-out agreement depends more on the eurozone’ s policy choices than Cyprus’ domestic policy choices”, the ratings agency says in a statement.

It is noted however that the agency expects that “Nicos Anastasiades’ election will hasten progress in bail-out negotiations”.

“We expect Mr. Anastasiades will quickly form a new cabinet after taking office at the beginning of March”, the S&P says, adding that having secured 57.5% of the vote Anastasiades’ mandate “appears stable, although reported abstentions were relatively high at about 20%”.

The agency continues to express the belief that the new President of the Republic will engage as a matter of priority with the Troika (EC, ECB, IMF) and other potential lenders, including S&P adds the Russian government.

“In our view, however, Mr. Anastasiades` ability to strike a balance between retaining domestic popularity and agreeing a bail-out that satisfies creditors and their national interests appears to be limited and narrowing”, the agency notes.

According to S&P “while Mr. Anastasiades’ approach to issues such as the partial privatization of state-owned enterprises (SOEs) will likely help advance discussions with Cyprus` official lenders, other factors such as the timing and terms of a bail-out agreement between Cyprus and its official lenders may be more difficult”.

“We also view Mr. Anastasiades` approach to fiscal policy as more closely aligned with likely program conditionality than the previous administration’s”, it continues.

It is further noted that “any bail-out agreement will likely involve Cyprus accepting already-unpopular measures, such as the sale of SOEs”.

“The monetization of future gas reserves or any restructuring of cooperative banks could also provoke political or institutional opposition”, S&P adds.

The ratings agency also delves into risks of Anastasiades’ mandate diminishing “amid challenging growth prospects and 14% unemployment”, a percentage S&P estimates will rise further.

“Short of stop-gap measures that would, in our view, only temporarily postpone a further deterioration, we note that the Troika has yet to agree to a bail-out that ensures debt sustainability without sapping Cyprus` remaining growth drivers”, S&P warns.

The agency believes that “measures such as significantly increasing the corporate tax rate or introducing a tax on bank deposits or proposed financial transactions tax could further stifle growth and reduce incentives for bank privatization”.

“The sources of future growth in Cyprus remain uncertain”, the statement says, forecasting “real GDP growth will average -1.5% over the next three years”.

S& P’s sovereign credit ratings and outlook on Cyprus are CCC+/Negative/C.

Excluded from international markets, Cyprus requested financial assistance from the European Stability Mechanism, after its two largest banks sought state aid following massive write downs of the Greek bond holdings as a result of the haircut of the Greek sovereign debt.

The Cypriot authorities and the Troika agreed in principle on a Memorandum of Understanding containing the terms of the financial assistance programme estimated at €17.5 billion, which is equal to the country`s GDP. However the memorandum is yet to be signed.