Fitch downgraded on Friday evening Cyprus’s Long-term foreign and local currency Issuer Default Rating (IDRs) by two notches to ‘B’ from ‘BB-‘ with a negative outlook.
The downgrade partially reflects the agency’s view that the size of the government support to the banking sector is likely to be higher than previous Fitch estimates, which mainly focused on the three largest banks.
Uncertainty regarding the capital needs of the cooperative banks remains.
Including the latter, the total recapitalisation costs of the banking sector could be up to €10bn, although Fitch anticipates that this figure may include a degree of headroom.
If fully realised it would increase the size of the necessary official support program for the Cypriot sovereign to over €17bn. In this scenario Fitch forecasts that government debt to GDP would jump to over 140% in 2013 significantly higher than Fitch’s previous estimate of peak debt of 120% of GDP.
Fitch expects the recession to deepen in 2013 with GDP shrinking by 3.5%. Cypriot GDP likely contracted by 2% in 2012 after growing by a mere 0.5% in the previous year. The economy will struggle to grow until 2015.
source: Euroxx Research