Standard & Poor’s Rating Services lowered on Thursday its long-term sovereign credit rating on the Republic of Cyprus to ‘BBB’ from ‘BBB+’, prompting the Finance Ministry of Cyprus to call on political parties to vote the 2012 budget.
The Ministry of Finance also urges the parties to approve all measures aimed at reducing the country’s fiscal deficit.
The S& P further lowered the short-term sovereign credit rating on Cyprus to A-3 from A-2 while the long-term rating remains on CreditWatch with negative implications, where it was initially placed on August 12 2011
According to S&P, the contingent liabilities posed to the Cypriot government by the Cypriot banking system’s exposure to Greece continue to weigh heavily on the ratings of Cyprus. It also said that the “Greek default scenario with private sector involvement or ‘haircuts’ higher than previously agreed by commercial creditors would necessitate the recapitalization of some domestic banking institutions, either through a public offering or a government capital injection”.
Furthermore, it said “we further believe the effect of a Greek government default could reverberate through Cyprus’ economy in the form of private-sector funding costs increasing beyond our previous expectations, thereby reducing investment and overall domestic demand”.
S&P further said “weaker economic growth could worsen the Cypriot government’s debt dynamics and reduce the willingness of its political leaders to press forward with fiscal and labor market reforms”.
“We estimate the exposure of Cypriot banks to Greek debt at about 165% of Cyprus’ GDP. Depending on the PSI levels, in any forthcoming Greek sovereign debt exchange, this could result in bank recapitalization needs of up to 10% of GDP”, S&P added.
Reacting to the S&P decision, in a statement, the government of the Republic of Cyprus “acknowledges the challenges which the Cypriot economy is facing due to the negative developments from Europe’s debt crisis.
For this reason, it adds, “the Government intends to act promptly and decisively to take all necessary measures to achieve fiscal consolidation and to handle the challenges of the banking system in cooperation with the Central Bank”.
It urges the political parties to vote in favour of the 2012 Budget as well as all measures for fiscal consolidation “to give the message to markets that the Republic of Cyprus is determined to handle the challenges in an effective and decisive manner”.
On August 26th the House of Representatives approved the first of two packages of austerity measures aiming at fiscal consolidation. Presenting the 2012 state budget, Finance Minister Kazamias said it contains structural measures aiming to avert negative developments to the Cypriot economy.
It provides for total revenues of 6.22 billion euro, compared with 5.64 billion of 2011 and total expenditures, excluding loan payments, of 7.54 billion euro compared with 8.01 billion of the 2011 state budget.
The budget also includes provisions for a 10% reduction in entry-level salaries for civil servants, abolition of 1100 vacant positions in the civil service, continuation of the freezing of procedures to fill up vacancies and for reducing by 200 million euro social benefits both by lowering the level of benefits and by introducing income criteria for certain benefits.
