Moody's: Cyprus Government Bond Upgraded to B3

Cyprus’ government bond rating remains constrained, the agency explained, by substantial credit challenges, including a weak economic outlook and the high – and rising – non-performing loans (NPLs) in the banking sector, which generate further negative risks to the government’s balance sheet.

The rating agency noted that Cyprus’ fiscal metrics have exceeded the targets set with its Troika of international lenders; in 2013, the primary deficit fell to 2% of GDP, versus its target of 4.2% in the original programme. Most of the measures aimed at permanently reducing the deficit were included in the 2013 budget, and resulted in significant fiscal consolidation of 7.5% percentage points of GDP over the period 2013-14.

Moody’s underlined that local banks’ balance sheets have been bolstered through increased capital buffers, external deleveraging (through sales of non-core activities overseas) and improvements in their funding profiles. As a consequence, the sovereign’s susceptibility to shocks emanating from the banking sector has decreased, to some extent.

 According to Moody’s, the stable outlook reflects a balance of risks. On the one hand, the agency expects that the government’s commitment to continuing its fiscal consolidation efforts will remain high, and that progress achieved in consolidating public finances and restoring the banking sector will most likely not reverse. On the other hand, the weak economic outlook and the high NPLs in the banking sector continue to pose risks to debt sustainability.