In addition to Thursday’s three notch downgrade, Moody’s added that it saw a 50 per cent probability the Mediterranean island would “default outright or press for a distressed exchange” on its debt.
Moody’s has downgraded Cyprus’ rating nine notches over the past 10 months and the country’s rating now stands just three notches above default.
The outlook is negative reflecting Moody’s view that the situation could deteriorate over the next 12 to 18 months due to:
- Liquidity concerns. Although Moody’s base assumption continues to be that access to short-term funding will remain sufficient for the Cypriot government to meet its funding needs, the rating agency notes that, in the absence of a disbursement from the Troika, the government may face a severe crisis.
- Bank recapitalisation needs. The government has employed a US asset manager, Pimco, to estimate the banks’ recapitalisation needs. Until its report is finalised later in January, there will be lingering uncertainty about the amount of support that the government will need to provide to Cyprus’s banking sector in 2013.
- Progress of negotiations with the Troika. While Moody’s believes that the current agreement in principle between Cyprus and the Troika on an MoU represents significant progress, the rating agency notes that the finalisation of an agreement and disbursement of funds have been delayed and that an assessment of debt sustainability has also not been completed. Moody’s base assumption continues to be that the Cypriot government will be able to reach an agreement with the Troika that will result in the provision of official assistance to the Cypriot government until at least 2016 – however, questions about debt sustainability remain central to Moody’s views on the probability of a default event for Cyprus.