S&P revises Cyprus outlook to stable in view of bailout agreement

Credit rating agency Standard & Poor’s revised the outlook on the long-term rating on Cyprus to stable from negative, saying that the immediate risk of a sovereign default has receded.

At the same time, S&P affirmed the ‘CCC/C’ long- and short-term sovereign credit ratings on Cyprus, noting that that the program implementation and economic risks remain considerable.
“We expect the Cypriot government will agree to the terms of an up-to €10 billion financial assistance program from the International Monetary Fund (IMF) and the European Stability Mechanism (ESM)” S&P said on Wednesday.

It is added that the program’s first loan tranche will be disbursed in time for the government to make a June 4 payment due on a Eurobond.
Moreover, the ratings agency says it expects Cyprus to remain a member of the Eurozone, adding however, the likelihood of recently imposed capital controls to remain, in some form, in order to protect the country’s banks from renewed deposit flight.
The agency also projects that that Cyprus’ economy will contract by an estimated 20% between 2013 and 2016.

Cyprus’ economic prospects will remain difficult over the near term, S&P goes on, saying that it expects economic growth to depend on a significant reorientation of the economic base, likely including the development of offshore gas fields.
It is added that the expected downsizing in the public sector and financial services sector, as well as the banking system, will likely lead to significant job losses in these areas as well as in real estate and tourism, which account for over 50% of Cyprus’ GDP.

Moreover, it is noted that weak growth and employment prospects may also weigh on public and political support for an ambitious budgetary consolidation program, while raising questions about debt sustainability.