RATING AGENCY Fitch on Monday cut Cyprus’ rating further into junk and warned more cuts could be on the way as an EU/IMF rescue programme could fail.
The agency cut Cyprus’ long-term foreign currency issuer default rating to B-minus from B with a negative outlook due to the country’s elevated economic uncertainty.
“Cyprus has no flexibility to deal with domestic or external shocks and there is a high risk of the (EU/IMF) program going off track, with financing buffers potentially insufficient to absorb material fiscal and economic slippage,” Fitch said in a statement.
The local currency issuer default rating (IDR) was cut to `CCC` from `B`. The Rating Watch Negative (RWN) on both ratings has been removed. The short-term foreign currency IDR and the country ceiling have been affirmed at `B`.
According to Fitch, 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.
The downgrade of the foreign currency IDR to `B-` reflects the elevated uncertainty around the outlook for the Cypriot economy due to the high implementation risks on the agreed programme and the restructuring of the banking industry.
Fitch acknowledges that the programme improves the immediate position of the sovereign from both a liquidity and solvency perspective, however, it notes that Cyprus has no flexibility to deal with domestic or external shocks and there is a high risk of the programme going off track, with financing buffers potentially insufficient to absorb material fiscal and economic slippage.
A premature lifting of capital controls that triggers material capital flight could have large negative economic consequences, says Fitch.
It further notes that public debt is likely to peak higher than the 126 per cent of GDP by 2015 assumed under the programme, reflecting Fitch`s view a deeper recession in the later years of the programme is possible and that there is little sign at this stage of the potential for Cyprus to transform its economy successfully away from sectors associated with the shrinking financial sector.