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Standard And Poor's Downgrades Cyprus

by Lorys Charalambous,, Cyprus

22 November 2010

Standard and Poor’s has lowered Cyprus’s long-term credit rating to A, from A+, with a negative outlook, citing ‘credit risk’, exposure to Greek assets, and its dependence on the performance of its financial services centre.

Benjamin Young of Standard & Poor’s said: “The downgrade reflects our opinion of increased vulnerabilities from embedded credit risk of the Cypriot financial system's external assets and domestic loan book, and the impact these could ultimately have on public finances.”

Standard and Poor’s said that the size of Cyprus's domestic credit, which stands at 280% of gross domestic product (GDP) is the highest in Europe – with much of it collateralized by property assets, values for which have declined over the last two years.

Young said that while the banking system reports high capital levels, "the sheer size of Cyprus's financial center poses funding risks in our view.”

Cypriot authorities are faced with tackling the country’s deficit, which drifted out to 6% in 2009, placing Cyprus under the European Union’s excessive deficit procedures. The government has introduced a number of austerity measures in response, which are expected to cut the deficit by 0.5% by the end of 2010, and by a further 1% in 2011, to bring the deficit to within 4.5% of GDP in 2011.

The government has in particular opted for public sector retrenchment rather than tax increases, although announcing an increase to the value-added tax rate on previously zero-rated goods, namely pharmaceuticals and certain food items, to 5% by 2011.

The European Commission is requiring that Cyprus bring its deficit to within the Maastricht Criterion of 3% of GDP by 2012.

TAGS: tax | investment | European Commission | value added tax (VAT) | fiscal policy | banking | financial services | international financial centres (IFC) | offshore | Cyprus | services | Europe

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