Sale of the Cyprus Cooperative Bank (CCB) will increase Cyprus’ sovereign debt but not alter the medium-term trend of debt to GDP falling steadily from next year, Fitch Ratings said.
The government agreed with Hellenic Bank to transfer Co-op assets amounting to €10.3 bln and deposits of €9.7 bln, after taking over the struggling credit institution in 2014.
To secure the deal by the state issued government bonds amounting to €3.19 bln to bolster the Co-op’s assets. The sale was also accompanied by an asset protection scheme offered by the CCB to Hellenic and guaranteed by the government.
Fitch said the new bonds meant that Cyprus’ Debt-to-GDP ratio will rise to 110% in 2018 from 97.5% at end-2017.
“This is a larger increase (by around 6pp) than we forecast when we upgraded Cyprus`s sovereign rating to `BB+`/Positive in April this year. But we still forecast debt to GDP to fall back below 100% within our rating horizon, albeit one year later, in 2020, as Cyprus continues to achieve fiscal surpluses and strong economic growth supports revenues,” Fitch said.
It said, “these debt dynamics provide a degree of fiscal headroom to absorb some materialisation of contingent liabilities from the banking sector, as we commented when we upgraded the sovereign.”
Furthermore, Fitch pointed out that by retaining most of CCB`s non-performing exposures (NPEs) in the residual entity, the transaction will reduce banking sector NPEs by €5.7 bln and bring the NPE ratio to 37% from 44%.
“While the ratio would still be very high (the EU average non-performing loan ratio is around 4%), this would help the process of cleaning up the banking sector, whose exceptionally weak asset quality and capacity to undermine economic stability and growth are a sovereign rating weakness,” Fitch added.
Concerning the broader reform package aiming at tackling bad loans in the banking sector, Fitch said similar measures have helped reduce NPEs elsewhere in Europe, but progress can be slow (in significantly speeding up recovery times, for example) and depends on effective implementation.
On the ESTIA scheme, designed to support troubled home mortgage borrowers through loan restructurings and state subsidies, operational from January 2019, Fitch said the estimated cost of €814 mln over 25 years, implying an estimated yearly fiscal cost of up to 0.25% of GDP is incorporated in its deficit forecasts
The agency also said it placed Hellenic Bank`s `B` rating on Rating Watch Positive on 29 June, “reflecting our view that the acquisition will be positive overall for the bank`s credit profile.”
“We think the benefits of a stronger franchise, improved asset quality and better longer-term profitability prospects offset the combined entity`s still-high NPEs and significant execution risks related to the integration of assets and liabilities acquired from CCB,” Fitch said.
