Standard & Poor’s surprised analysts and lifted its credit rating on Cyprus for the first time in three years on Friday, raising it to B- from CCC+, and kept the outlook stable, saying that the immediate risks to the island’s austerity programme had receded.
It lowered its credit rating for the Netherlands to AA plus from AAA, while lifting its outlook for the struggling economy of Spain.
The rating agency said it was confident that the Cypriot government – having successfully completed the first two reviews of its austerity programme as agreed with the Troika of international lenders – would continue to comply on time. Fitch rates Cyprus B- , and Moody's Investors' Service at Caa3.
President Nicos Anastasiades was quick to respond but sought to tone down his enthusiasm, saying that the upgrade “is not only the result of painful sacrifices on behalf of the people, but also of the coherent and decisive policy” of his administration and all stakeholders during the past eight months.
Anastasiades pledged that his government “will continue with the same prudent and disciplined policy to manage the difficulties ahead.”
His pro-business administration inherited a bankrupt state from the previous communist government power in March, just days before the Eurogroup of eurozone finance ministers imposed a harsh austerity programme in order to secure a 10 bln euro bailout. Following years of mismanagement of the state budget and an uncontrolled expansion of its small banking sector, Cyprus has been shut out of international lending to keep the public sector afloat, made worse by the collapse of the banking system that had been overexposed to Greek government bonds.
“Even if I express my satisfaction, I do not believe that this is the time for exultation, but certainly similar messages, such as this by the rating agency, strengthen the gradual restoration of trust in the Cypriot economy, an element necessary to achieve the restarting of our economy the soonest possible,” Anastasiades added.
“The programme has improved the government’s debt profile, covering its borrowing requirements (apart from 6% of GDP in short-term debt) through to March 2016,” S&P said.
The rating agency also said that it could lower the ratings “if the government appeared unable to fulfil the Troika’s conditions or if a large government financing gap emerged”.
It said that the biggest risk to complying with Troika borrowing conditions will likely be in the area of the government’s privatisation targets.
Reuters reported that lenders have since reviewed Cyprus's progress twice, giving it positive reviews.
S&P said the biggest challenge in Cyprus meeting lenders' conditions was a privatisation programme (of telecoms, electricity and ports), expected to raise 1.4 bln euros by 2018.
An upside risk to the economy was anticipated revenue from offshore gas finds, but commercial incentives could be thwarted by the island's political division between Greek and Turkish Cypriots, the rating agency said.
DIJSSELBLOEM’S OWN MEDICINE
Moritz Kraemer, chief sovereign ratings officer at S&P, was quoted by CNBC as saying that the Netherlands’ downgrade was triggered by the country’s weak economic growth prospects.
The agency’s report said it expects the country's GDP to contract by 1.2% in 2013, before growing by 0.5% in 2014 and slowly accelerating to 1.5% by 2016. It argued that real economic output for the country will not surpass 2008 levels before 2017.
The cut means the only euro zone countries to retain their AAA rating at S&P are Finland, Germany and Luxembourg.
“We think the policy consensus is strong enough to bring the needed adjustments on the fiscal side, on the budgetary side, and that is reflected in our stable outlook that we have assigned at the same time,” he told CNBC. “And remember that the outlook on the formerly AAA rating of the Netherlands had been on a negative outlook for almost two years.”
S&P’s downgrade follows Deutsche Bank's warning in August that the "abysmal" Dutch economy threatened the euro zone recovery. The bank's analysts said in a note that: "The Netherlands is more akin to a 'peripheral', with dramatically rising unemployment, spiking business failures and economic confidence detaching from the AAA peer group and moving to crisis country levels."
The European Commission estimates that unemployment in the country will reach 8% in 2014, compared to less than 4% in 2009.
Finance Minister Jeroen Dijsselbloem, widely regarded as the architect of the experimental bail-in imposed on depositors in Cyprus banks, told CNBC he takes the downgrade of his country's credit rating seriously, and insisted the country was pushing ahead with economic reforms.
"It just confirms the need for us to push forward some of these reforms so that we can get bigger and better growth figures," he said.
Two other ratings agencies – Moody's and Fitch – had only recently affirmed their AAA ratings for the Netherlands, Dijsselbloem added.
The Dutch government was "dealing with a number of structural issues in our economy such as the labor market, housing market, and pensions, and these are the main factors that are holding back our economic recovery," he said.
SPAIN OUTLOOK STABLE
S&P also positively revised its credit ratings outlook for Spain – to stable from negative – stating that the country's external position was improving as growth gradually resumed.
Speaking to CNBC, Kraemer said that there were promising signs that the Spanish economy was finally beginning to turn a corner.
"What we're seeing in Spain is two developments which we consider both stabilizing. One is that the Spanish economy has made some notable progress in the re-balancing of its external deficits," Kraemer said. "We actually forecast for this year of a current account surplus which would be the first one since 1986."
He added: "We also think that the economy is bottoming out; that the long, drawn-out and deep recession is coming to an end. We see moderate growth in the coming year and in 2015. But even with a growth rate somewhere just over 1 or 1.5%, that would be the highest growth rate that Spain has recorded since 2007."
Despite revising its outlook for Spain, S&P maintained its rating at BBB-/A-3.
The news follows data from Spain that indicates the country's economy is at last improving. Spain's GDP grew by 0.1% in the third quarter, data released by the country's statistics agency showed at the end of October.
Wolfango Piccoli, managing director at Teneo Intelligence, told CNBC that Cyprus' upgrade was the surprise move, while the changes to S&P's outlook for Spain and the Netherlands were less shocking.
