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UPDATE: Ratings rise ‘best reward’ as S&P, Fitch upgrade Cyprus

By George Psyllides

TWO leading ratings agencies, Standard and Poor’s and Fitch, upgraded their outlook for Cyprus on Friday, based on better-than-expected performance of the economy and strict adhering to the bailout plan of the Troika, with officials suggesting this is the beginning of a very long road to recovery.

President Nicos Anastasiades said that although the problems of the economy have not been overcome yet, nonetheless this was the best reward for the nation that was struggling with the crisis.

The two agencies also raised their ratings on Spain and Italy, suggesting the recovery is spreading to the peripheral regions left most exposed to the euro zone’s financial crisis.

S&P upgraded the island’s sovereign credit rating to ‘B’ from ‘B-’ with a positive outlook due to better-than-expected economic performance in 2013. This was its second upgrade for Cyprus since it came close to financial collapse last year.

Fitch Ratings revised the outlook on Cyprus’s long-term foreign currency Issuer Default Rating (IDR) to stable from negative and affirmed the IDR at ‘B-’.

The agency has also upgraded the long-term local currency IDR to ‘B-’ from ‘CCC’.

A month ago, Moody’s changed the outlook on the Cyprus Caa3 government bond rating to ‘positive’ from ‘negative’, while it also affirmed the island’s Caa3 rating, to reflect the still-elevated risk of Cyprus defaulting on its debt, or undergoing debt restructuring over the medium term.

“We remain down to earth and we continue the effort with confidence,” Finance Minister Harris Georgiades said on Twitter.

The main drivers for the upgrades were the better-than-expected performance and the continuing progress in the implementation of the €10bn bailout adjustment programme.

“The upgrade primarily reflects Cyprus’ better-than-expected economic performance, based on its resilient tourism and business services sectors, and the fact that consumer spending in the private sector has not dipped as much as we anticipate,” S&P said.

“In addition, the government outdistanced its 2013 fiscal targets by a considerable margin, and we anticipate a repeat performance in 2014.”

The government also continued to implement the economic adjustment programme as planned, reducing the risks to full and timely payment of its debt service, S&P said.

Fitch said the outcome reflects a large fiscal correction and a less severe-than-expected recession.

Tight expenditure control contributed significantly to the favourable outcome.

Fitch revised its fiscal deficit projections to 5 per cent of GDP in 2014 and 4.6 per cent in 2015, from 7.5 per cent and 6.9 per cent, previously.

Risks to programme implementation have eased on recent performance, Fitch said, but remain elevated.

The agency said medium-term targets, in particular, were ambitious.

Official projections showed a 3.3 percentage point improvement in general government primary balance in 2016 to a surplus of 1.2 per cent of GDP which could prove difficult to achieve.

A significant portion of the consolidation also remains outside the programme period which ends in the first quarter of 2016, it said.

President Anastasiades said the two upgrades were the best reward for the efforts made by the government and society to tackle the effects of the economic crisis.

However, he added in a statement, upgrades on their own did not mean the end of the crisis.

“We are not yet in a position to say we have overcome the problems, but the upgrades are confirmation that we are on the right path.”

Anastasiades reiterated the government’s determination to carry out the necessary reforms so that the country would never again face the same dead-ends as last year, when it had to agree to shut down Laiki Popular Bank and seize deposits to recapitalise Bank of Cyprus, conditional to receiving a €10bn bailout.

He thanked the people of Cyprus for their “patience and maturity and the exemplary manner with which they handled the problems.”

“The government’s thoughts are with the vulnerable groups of the population who are experiencing poverty,” the president said.

Anastasiades added that “taking into consideration the three successive positive evaluations by the Troika, the significant improvement in the yield of the 10-year Cypriot bond, which dropped from 14.6% in June 2012 to 5.6% today, as well as the laudatory commentaries by the international financial media, we can say that a secure foundation is being established for the prospects that are opening up for the Cypriot economy to return to rates of growth at the earliest possible.”

The two ratings agencies also gave a broadly upbeat assessment of the euro zone’s creditworthiness on Friday, contrasting sharply with the reviews of recent years and reflecting growing confidence in the region’s fiscal and economic recovery.

On a day of credit updates scheduled for three of the region’s top four economies, S&P affirmed its ratings on France at AA with a stable outlook and Fitch raised its outlook on Italy and upgraded Spain.

Borrowing costs for the countries worst hit by the crisis have fallen sharply this year as the European Central Bank’s loose monetary policy encourages investors hunting for returns to bet on their recovering economies, a Reuters report said.

Italy’s benchmark 10-year bond yielded 3.12 per cent on the secondary market on Friday, not far from a record low of 3.07 per cent hit last week.

Fitch improved by one notch Spain’s sovereign credit rating to BBB+, three steps above ‘junk’.

Fitch also boosted its outlook on Italy to ‘stable’, with the sovereign rating affirmed at BBB+. That followed an upgrade earlier this month of its outlook on bailed-out Portugal to ‘positive’ from ‘negative’.

In a separate statement about the euro zone as a whole, Fitch said improving public finances were “major achievements,” although still-high debt levels in the region and its weak medium-term growth outlook warranted caution.

A wave of euro zone credit downgrades during the financial crisis led policymakers and economists to blame the ratings agencies for exacerbating investor flight from the region – blame the agencies say is misplaced.

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