Fitch Ratings On Monday lowered the credit ratings of Cyprus, citing an increase in the capital required to be injected into the country's banks. The agency maintained the outlook at 'Negative'.
Fitch downgraded Cyprus's long-term foreign and local currency Issuer Default Ratings (IDR) to 'BB+' from 'BBB-', and kept the outlook 'Negative'. At the same time, the short-term ratings were reduced to 'B' from 'F3'. The eurozone country ceiling was maintained at at 'AAA'.
The agency said the downgrade reflected a sharp increase in the capital Cypriot banks will require, compared to its previous estimate. The increase is principally due to Greek corporate and households exposures of the largest three banks, Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank, and to a lesser degree the expected deterioration in their domestic asset quality, it said.
Cyprus' medium-term economic outlook is weak. The economy is expected to stagnate this year and next, and will recover only slowly as macroeconomic imbalances unwind and the headwinds from the eurozone and Greek crises persist, the agency said.
The Negative outlook, which primarily reflects risks associated with a further worsening of the eurozone crisis, indicates a heightened risk of further downgrades.
According to Fitch's preliminary estimates, in the event of a Greek exit from the eurozone, Cypriot banks could require significantly more capital than currently incorporated into Cyprus's 'BB+' sovereign ratings. The uncertainty surrounding the outlook for Greece is a material negative factor in the rating and Outlook for Cyprus, the agency said.
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