DBRS Ratings Limited has given the Cyprus sovereign a double rating upgrade, pushing it up to investment grade, driven by the banks’ effective downscaling of non-performing loans, the ‘orderly’ liquidation of the Co-operative bank and solid performance of the island’s economy.
The Canadian rating agency announced late Friday that it upgraded the Republic of Cyprus’s long-term foreign and local currency – issuer ratings from BB to BBB (low) and its short-term foreign and local currency – issuer ratings from R-4 to R-2 (middle).
This is the third upgrade out of ‘junk’ and to investment grade from the ‘Big Four’ rating agencies, following similar actions by Standard & Poors and Fitch.
DBRS also changed the trend from ‘positive’ to ‘stable’ prompting Cyprus Finance Minister Harris Georgiades to tweet: “New double upgrade of the Cyprus economy. We continue…”
The minister feels vindicated after harsh criticism from opposition parties, as well as from within his own ruling party, for shutting down the Cyprus Cooperative Bank that continued to bleed losses, despite a whopping government rescue of €1.7 bln.
The Co-op should have closed down a long time ago, he told a critical panel of judges this week probing the collapse of the bank, because it was burdened with a mountain of non-performing loans and had been poorly managed for the past decades, due mainly to abuse and intervention by political parties and trade unions.
In its rating upgrade report, DBRS said that “the upgrade is driven by the material reduction in Cypriot banks’ non-performing loans (NPLs) in recent months, reflecting the government’s and the banks’ stepped up efforts. Together, the orderly liquidation of Cyprus Cooperative Bank and the banks’ sale of NPLs have almost halved the stock of the banking sector’s NPLs in 2018. While NPLs remain high, the decline in NPLs and a strengthened legal framework are reducing risks to financial stability.”
The rating agency added that the “upgrade is also driven by the continued solid performance of the Cypriot economy. Cyprus is on track to post real GDP growth of close to 4.0% in 2018, among the strongest in the Euro area. Growth is driven by investment, consumption and exports of services, and follows a 4.2% in 2017.”
Music to the ears of the Cyprus Finance Minister, DBRS said that in its assessment, “Cyprus’s credit fundamentals are now in line with investment grade, after recovering over the past few years. The ratings are supported by Cyprus’s solid budget position, its enhanced public debt management framework, its Eurozone membership fostering sustainable macroeconomic policies, and its openness to investment encouraging a favourable business environment.”
Not allowing Cyprus to rest on its laurels, DBRS added a warning, saying that “nevertheless, Cyprus also faces significant credit challenges related to still sizable NPLs in the banking sector, still high levels of private and public sector debt, external imbalances, and the small size of its service-driven economy, which exposes Cyprus to adverse changes in external demand.”
