Moody’s Investors Service has upgraded the government of Cyprus’s long-term issuer rating to Ba2 from Ba3. All senior unsecured bond and programme ratings have also been upgraded to Ba2 and (P)Ba2, respectively. Cyprus’ short-term ratings have been affirmed at Not Prime (NP) and (P)NP. The outlook on Cyprus’ ratings has been changed to stable from positive.
According to Moody’s the upgrade of Cyprus’ ratings to Ba2 from Ba3 is driven by a number of factors, such us the ongoing recovery of the banking system, in the context of which the liquidation of Cyprus Co-operative Bank Ltd via the sale of its healthy assets and liabilities has materially reduced systemic risks emanating from the banking sector. Also from the positive fundamental trend with respect to the government”s balance sheet, based on robust nominal growth and a primary surplus, irrespective of the one-off related to the recent CCB transaction.
The stable outlook on Cyprus’ Ba2 ratings, balances Cyprus’ strong fiscal dynamics against pressures for higher public expenditure. It also reflects uncertainty around the extent to which new legal tools will enable a material decline in the banking system’s non-performing loan (NPL) ratio, it says.
Moody’s would consider changing the outlook on the Ba2 ratings to positive and eventually upgrading Cyprus’ Ba2 ratings if Moody’s were to conclude that macroeconomic conditions and policy actions were to result in a sustained and significant decline in the government debt stock and in the stock of non-performing loans in the banking sector, it adds.
Downward pressure that could lead to a negative outlook and eventually a downgrade of the rating could develop if growth or fiscal policy decisions were to cause a reversal of the supportive fundamental debt trend. A failure to translate recent legislative actions and interventions in the banking sector into a significant decline in the non-performing loan ratio would also be credit negative, Moody’s says.