Cyprus hit by another downgrade from S&P, deal with Troika is questioned

Angry demonstrators protest as lawmakers discuss new austerity laws in Cyprus' parliament, December 12, 2012 (Reuters / Andreas Manolis)
S&P has cut the rating for Cyprus by two more notches, adding that the outlook is also negative. Progress around the bailout agreement with the Troika of international creditors will be playing a major part in the country’s future.

The rating agency lowered long- and short-term sovereign credit ratings on Cyprus ' from 'B/B' to 'CCC+/C, which means it classifies the country as “currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.”

“The downgrade reflects our view that Cyprus' creditworthiness has deteriorated further since the last downgrade on Oct. 17, 2012, as financing pressures have intensified and uncertainty about the terms of any official support persists ahead of the February 2013 Presidential elections,” the agency explained.

The outlook was also negative, as S&P had doubts the country’s authorities could be quick and efficient in helping its economy out of the crisis, and that international creditors will decide to stretch out a helping hand.

The critical question was how the Cyprus’ authorities were going to help the country’s collapsing banking sector, which is in a hole estimated at €95bn, or 530% of its GDP. Also whether Cyprus will manage to meet the obligations it had undertaken to the Troika of international creditors – the IMF, EU, and ECB.

“…The ratings could stabilize at their current levels if we see that a program is quickly agreed and if growth prospects, government debt, and external funding needs begin to stabilize,” S&P added.

The Eurogroup will not write down Cypriot sovereign debt, as it would risk the credibility of the euro zone, outgoing Eurogroup chief Jean-Claude Juncker told German radio on Friday. Earlier he said the fiscal situation of Cyprus is “more serious than Greece,” the country largely seen as the one that was hit the hardest by the current turmoil. On top of that, Cyprus is massively exposed to Greek debt and its banking sector, which creates a huge pressure on Cyprus.

In Troika we trust

On Wednesday Cyprus' lawmakers overwhelmingly approved the 2013 state budget amid efforts to finalize a bailout deal with international lenders in order to rescue the country's troubled banks and pay its bills. Still, the new document envisages €9.5bn expenses, while the revenues are projected to stand at €7.6bn. This means that the island state wouldn’t survive without outside help.

Earlier in the week Cyprus secured €250mn in loans from state companies to provide for everyday needs while the financial aid from international creditors is coming. The final agreement with the Troika is expected to be fixed no sooner than in the second half of January 2013, when Cyprus expects to receive up to €17.5bn – a figure comparable with the country’s GDP and the largest yet bailout package paid to any euro zone member. The lion’s share of the entire bailout – about €10bn – is planned to be spent to rescue its suffering banks.

A draft version of the bailout stipulates spending cuts of 7.25% of GDP and a budget surplus target of 4% of GDP by the end of 2016.

Given all the financial fragility of Cyprus, the IMF said a day earlier that the country needed to announce a partial default before it joins a bailout deal, according to the influential German daily Süddeutsche Zeitung. The major concern for the IMF was that even despite the adopted austerity measures the country wouldn’t be able to meet the interest payments due to its sky-high debt that is projected to jump to 92% of its GDP.

Cyprus' €17.5bn ($23bn) economy is projected to shrink 3.5 %, with unemployment rising to 13.7 % next year.

Russia has granted a €2.5bn loan which was supposed to last three years. Other reports say another €5bn loan due to come from Russia was stopped by Russia’s Finance Minister Anton Siluanov in early December.

Russian President Vladimir Putin said on Friday at the Russia-EU summit that Russia might join those trying to help solve Cyprus' financial problems, if it has the consent of the European Union.

Cyprus is a member of the European Union and we proceed from the fact that the European partners must agree certain rules to regulate relations inside the European Union, so it is not right of us to meddle with this process. But in a situation when such agreements are reached, we do not rule out a possibility to join the process of solving problems linked with the stabilization of the situation in Cyprus,” he said.