Cyprus has finally achieved the much sought-after investment grade after Standard and Poor’s upgraded the country’s creditworthiness status.
The major rating agency upgraded the island’s sovereign credit ratings from BBB-/A-3 to BB+/B with a stable outlook.
Making good on S&P’s upgrade, the Cyprus Republic issued an international bond on Monday pulling in EUR 1.5 bln. The Republic had initially asked the markets for EUR 1 bln with a coupon of 2.6% and was hammered with demand as the government received orders worth €5.6 bln.
The government was able to draw in EUR 0.5 bln more and with an interest rate of 2.4%, the best ever achieved for a Cypriot international bond.
S&P is the first major rating agency to take Cyprus out of the ‘junk’ category, in which it had classified Cyprus bonds six years ago in January 2012.
The move triggered a positive reaction from financial and political analysts, but some underlined the dangers that still persist.
Analysts in the banking sector said the move means that Cypriot banks will also be able to borrow money from institutions such as the European Central Bank on better terms. They pointed out that the sale of non-performing loans coupled liquidation of the Co-op played a key role in S&P’s decision to upgrade the Cypriot economy.
S&P said: “Cypriot authorities have carved out the bad assets of the country`s second-largest bank, paving the way for a significant reduction in the banking sector`s nonperforming assets”.
S&P’s upgrade is perceived as a clear message to investors as the agency is satisfied that conditions have returned to normal after Cyprus pulled off a restructuring scheme to bring down public and private debt while clamping down on the huge size of the banking system’s NPL exposure.
As Fiona Mullen of Sapienta Economics, put it “the liquidation of the Co-op has shifted the bad debt burden away from the banks, while Hellenic Bank was saved from the same fate. We now have two banks that have manageable NPL portfolios”.
S&P anticipate further strong economic growth through to 2021, while prudent policymaking and only moderate state support to the banking system will allow the government to run budgetary surpluses and prompt a reduction in public debt.
It said it could consider raising the ratings on Cyprus over the next two years if the economy deleveraged significantly, or if the banking sector reduced its nonperforming exposures (NPEs) materially and its financial conditions improved.
The rating agency projects that the Cypriot economy will grow by 4% in 2018 and by 3% on average between 2019 and 2021. Real GDP growth by 4% in 2018, will allow a return to the economy’s 2011 pre-crisis size, it is added.
S&P also noted that the unemployment rate has been on a declining trend, falling from 16% in 2014 to 11% in 2017, then further to 9.5% in the first five months of 2018.
However, as the agency adds, the ratings could come under pressure if economic growth is significantly lower than the projections, endangering private debt service and further financial sector improvements, or if contrary to the expectations, the general government debt burden rises substantially.
In a word of caution, S&P said the ratings for Cyprus are constrained by the economy`s high indebtedness reflected both in its public and private balance sheets, the ever-high proportion of NPEs in the banking system, and Cyprus` small size relative to other eurozone member states.
“The Cypriot private sector balance sheet is among the most indebted in Europe, at about 240% of GDP at the end of 2017 and is likely to remain high over the medium term.”
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