Ratings agency Moody’s downgraded Cyprus’s sovereign bond ratings two notches to A2 on Thursday, citing exposure of its banks to Greece, and concerns that a recent improvement in its finances was unsustainable.
The outlook for Cyprus is stable, Moody’s said, adding that a further downgrade could be on the cards if problems in the Cypriot banking sector from its Greek exposure were to ‘materially increase’ from current levels.
Moody’s said that Cypriot banks’ exposure to macroeconomic stress in Greece was substantial. Prolonged exposure increased the probability that those liabilities could manifest on the state’s balance sheet, it said.
It also questioned whether a recent improvement in government finances could be sustained, given the rigid structure of government spending on the state payroll and social transfers.
Cyprus’ three largest domestic lenders, Bank of Cyprus, Marfin Popular Bank and Hellenic Bank, have over 40 percent of their total lending in Greece, Moody’s added.