MOODY’S Investors Service downgraded Cyprus’s government bond ratings by one notch earlier to today to Ba1 from Baa3 and said that the outlook was negative.
Moody’s also downgraded Cyprus’s short-term rating to Not-Prime from Prime-3. Today’s rating action concludes the review for downgrade that Moody’s initiated on 4 November 2011.
In making its decision, Moody’s said that ”the increased risk that the Cypriot government would have to provide renewed financial support to the country’s banks because of their exposure to the Greek government and economy, and the commensurate impact of such measures on the government’s own financial strength.”
It also refers to ”the likely impact on market confidence in Cyprus stemming from these banking-sector concerns, as well as broader uncertainties about Europe’s macroeconomic prospects and institutional frameworks.”
”Overall, the fragile market confidence in Cyprus, which has already led to a loss of access to international debt markets, is likely to continue, with a high potential for further shocks to funding conditions for the sovereign and the domestic banks.”
Moody’s also said that its action was limited to one notch ”in acknowledgement of the positive developments in Cyprus since Moody’s placed the country’s rating on review for downgrade in November 2011.”
Moody’s is the second rating agency to downgrade Cypriot bonds to junk level after Standard and Poor’s (BB+). Fitch’s ratings has placed Cypriot bonds to BBB-, one notch above junk.
Government response
The Island’s Finance Minister said that Moody’s downgrade was “not justified”. Kikis Kazamias, who was commenting on today’s downgrade, said that he recognises the challenges the Cyprus economy must face due to its exposure to the Greek debt and the Eurozone crisis in general.
Mr Kazamias noted that the government remains focussed on preserving its fiscal targets, implementing growth measures and securing the necessary resources to cover all of its financial needs.