Standard & Poor’s on Wednesday upgraded the sovereign foreign credit rating on Cyprus to CCC-plus from selective default following completion of an exchange of bonds the credit rating agency deemed distressed.
Cyprus undertook a 1-billion-euro debt exchange as part of a financial adjustment program worked out with the troika of the European Union, European Central Bank and the International Monetary Fund.
On June 28, S&P said that the exchange should help alleviate strains on the nation’s financial liquidity and that after completion it would put the rating back up to CCC-plus.
When a rating is reduced to selective default, it signifies a distressed debt exchange, but also an assumption that the issuer will continue to honor its other obligations.
The affected bonds are known as “local law” bonds, meaning the covenants or rules governing payment of the debt are covered under Cypriot law, versus foreign law.
S&P added that despite all the financial maneuvering, “Cyprus’s economic prospects will remain difficult.”
The discovery of offshore natural gas fields, a positive prospect for future growth, will require a reorienting of the economic base as they are developed, S&P said in a statement.
However, the expected reduction in public and financial services will likely lead to “significant job losses in these areas as well as in real estate and tourism; these sectors account for over 50 percent of Cyprus’s GDP.”
The firm expects the economy to contract by about 20 percent between 2013 and 2016.
The outlook on the credit is stable, S&P said.
The rating is one notch higher than prior to the default because of easing immediate liquidity strains following the release of an additional 1-billion-euro tranche of financial aid from the troika.
In addition, S&P notes Cyprus extended the maturity of a 1.8 billion euro-denominated bond that came due June 28 for one year to July 1, 2014.