The outlook for the banking systems of Greece and Cyprus has changed to stable from positive because of economic disruption caused by the coronavirus outbreak, Moody's Investors Service said in reports published on Wednesday.
Moody's expects the economies of both countries will contract this year as the outbreak restricts business activity, before they return to growth in 2021. The Greek banking system's profitability will weaken and its nonperforming exposures (NPEs) will remain at high levels and close to around 40 percent of gross loans reported at the end of 2019, it said.
The rating agency noted that Greek government support measures include additional liquidity and working capital facilities for businesses, which will help slow new NPE formation, as will extended loan repayment periods for banks' more vulnerable customers.
It added that travel restrictions in Greece will hit the tourism sector in particular, which accounts for around 12 percent of the country's gross domestic product. At the same time, a steep drop in domestic demand will weigh on the transportation and logistics, trade and manufacturing sectors. While house prices have risen in the last two years, a material correction is unlikely given a steep price decline between 2010 and 2017,” said Moody’s.
In Cyprus, Moody's now expects an economic downturn this year, which will reverse the trend of steadily falling problem loans and erode banks' profitability. However, the banks have improved their capital and liquidity positions in recent years, which should enable them to absorb the deterioration in loan quality and earnings.
Moody's also expects Cypriot government and central bank support measures will limit long-term economic damage to businesses and households and there will be a healthy recovery in economic activity in 2021.