Cyprus faces danger of ‘fiscal deterioration’ — Moody’s

Credit rating agency Moody’s on Monday warned that Cyprus faces the danger of ‘fiscal deterioration in a note released on Monday.

In a scenario where the recovery stalls or falters, revenue will fall and governments are likely to respond by increasing borrowing and support measures, and these will have further significant fiscal implications, Moody’s explained.

“Our assessment of whether a government has a credible strategy to turn the fiscal deterioration around will therefore be a key driver of future rating trajectories. In spite of stable or improving debt affordability, the failure to develop and communicate early on policies capable of reversing this adverse trend in public finances would indicate challenges in the quality of institutions and governance, and would heighten exposure to more negative scenarios and raise the risk of shocks to investor confidence and unanticipated rises in the cost of debt.” Moody’s said.

“Clearly, sovereigns with elevated debt burdens even before the virus outbreak and facing structural obstacles to stronger growth will face the greatest pressures to act to reverse their rising debt trajectories, in order to minimise these risks,” the note adds. “This includes sovereigns like Italy, Cyprus, Spain and Portugal, but also France and Belgium.”

Weaker economic outlook

Moody’s also warned of a weaker economic outlook for most of Europe, and for Cyprus in particular.

“Our outlook for sovereign creditworthiness in the euro area in 2021 is negative, reflecting our expectations for the fundamental conditions that will drive sovereign credit over the next 12 to 18 months. Subdued and fragile growth prospects, together with calls for policymakers to support an inclusive recovery, will pose significant challenges to fiscal consolidation and debt stabilisation this year,” Moody’s explained.

Cyprus is not, however, among the most-threatened. “Sovereigns with high economic exposure to the coronavirus crisis, already limited fiscal space, institutional constraints and large refinancing needs, are
particularly at risk from a shock to investor confidence,” Moody’s pointed out.

Cyprus has fiscal space and no large refinancing needs nor institutional constraints, but it is affected by the economic slowdown caused by the lockdown and the dearth of tourism, Moody’s continued.

“Consumers’ lingering concerns about health and safety, as well as the potential for further lockdown measures, mean demand for international tourism is unlikely to approach previous levels until an effective vaccine is in wide circulation or a treatment that significantly reduces fatalities is available. Portugal (Baa3 positive) and Greece, the small island nations of Cyprus (Ba2 positive) and Malta (A2 stable) and two of
the EU’s largest member states, Spain and Italy, are most vulnerable to a sustained drop in tourist arrivals.
Countries with other sizeable high-contact services activities like Belgium (Aa3 stable) are also vulnerable to further stop-start restrictions on their ability to operate,” the note said.

Greece and Cyprus are particularly vulnerable to further bankruptcies and a rise in unemployment if government support measures are withdrawn, the note added.