Worrying about the creditworthiness of a small nation like Cyprus just feels so February and March now. Don’t tell that to Fitch Ratings today. The credit ratings agency has now downgraded Cyprus’s Long-term foreign currency Issuer Default Rating to ‘B-‘ from ‘B.’ Fitch also cut the local currency Issuer Default Rating to ‘CCC’ from ‘B’.
The Rating Watch Negative outlook on both ratings has been removed. The Short-term foreign currency IDR and the Country Ceiling have been affirmed at ‘B’. Again, this feels like a worry that would have mattered back in February and March, and maybe even in April.
The downgrades today reflects the elevated uncertainty around the outlook for the Cypriot economy based upon high implementation risks of the terms as well as the restructuring of the banking industry. While the liquidity and solvency have been raised, Cyprus is show to have no real flexibility to deal with domestic or external shocks. There is also believed to be a high risk of the program going off track.
Fitch expects that the public debt should peak above the 126% of GDP by 2015 and it has little visibility of Cyprus transforming its economy successfully away from sectors associated with the shrinking financial sector. A further 4.7% of additional measures are unidentified and will be needed to hit the 4% of GDP target for the primary fiscal balance by 2018. Revenue generation is also considered as uncertain.
Fitch said, “The downgrades of the Long-term foreign and local currency IDRs reflect the resolution of the RWN assigned to the ratings on 26 March 2013. At that time Fitch stated that it would resolve the RWN once details of the EU/IMF program had been agreed and also made public, taking into consideration the official parameters and the credibility of the assumptions, including those on the economic and fiscal outlook and terms of financing and fiscal sources and uses.”
Again, this call is one which we would not expect to have any serious ramifications for Cyprus and the peripheral woes in Europe from the PIIGS nations.