Autumn could bring negative rating pressure on the Cyprus economy if recent legislative actions in the banking sector failed to significantly reduce non-performing loans (NPLs) which now stand at 30%.
This clear message by four major credit rating agencies comes at a time when parliament approved amendments to the Mediterranean island’s foreclosures bill which basically slow down the process. Thus, making it harder for banks to successfully tackle the crucial problem of NPLs.
Finance Ministry sources told INSIDER that it is hard to tell how rating agencies will act with the most probable scenario being that they will not upgrade Cyprus’ economy.
The return of Cyprus’ economy to investment grade after six and a half years by S&P’s, Fitch and DBRS took place in the autumn of 2018. Their rationale was that the Cypriot economy would continue to grow at a solid pace through 2021.
Also, because some €7 billion NPLs from the collapsed Co-op bank had been transferred to KEDIPES. Moody’s rating had kept the Cyprus economy below investment grade.
S&P’s, Fitch and DBRS maintained a stable economic outlook for Cyprus during 2019. In their rationale, the agencies said that Cyprus’ ratings were based on a broad-based economic recovery and a substantial budget surplus but with the crisis legacy of high public debt and non-performing loans in the banking sector.
However, things will not be the same in the upcoming autumn assessments as the amended foreclosures legislation approved by parliament would most likely leave the state’s debt unchanged.
S&P is expected to make an assessment on September 6, followed by Moody’s on September 20, Fitch’s on October 11 and DBRS on November 15.
Moody’s already sounded alarm bells in its last report on Cyprus noting that the new foreclosures bill is yet another obstacle in the struggle for NPLs to be reduced. And that this could stand in the way of a much-needed upgrade of the economy.