Moody's downgrades Cyprus to Caa3 from B3; negative outlook

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FXstreet.com (Barcelona) - One new year, one new downgrade in the Euro-zone, this time being Cyprus the country receiving the always unwelcome news of a cut on its rating. Moody's Investors Service, minutes ago, confirmed the downgrade of Cyprus's government bond rating to Caa3 from B3, with the outlook on the rating also negative.

As Moody's explains:

"The key driver of today's rating action is the anticipated rise in the Cypriot government's debt burden, driven principally by the increased recapitalisation needs of its banking system following distressed exchanges on Greek government debt and rising delinquencies on loans to Greek and Cypriot obligors."

"Given that the resulting increase in the debt burden is likely to be unsustainable, Moody's believes there is a significantly increased likelihood that the Cypriot government may eventually default outright or press for a distressed exchange, although Moody's base case does not assume a default or distressed exchange in 2013."

"The negative outlook assigned to the rating reflects Moody's view that the situation could significantly deteriorate over the next 12 to 18 months because of three factors: (1) ongoing liquidity concerns; (2) uncertainty about the exact size of the necessary bank recapitalisations, which may exceed the rating agency's current projections; and (3) uncertainty about the upcoming finalisation and signing of a Memorandum of Understanding (MoU) with the IMF, EU, ECB, also collectively known as the Troika."



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