Cyprus has long a popular retirement destination for British expatriates, but its economy has struggling in recent years, hitting many expats hard, particularly those with homes that have fallen in value and are proving difficult to sell.
The exposure of Cyprus’s banking sector to Greek debt was cited by Moody’s as the reason for the downgrade, which followed by less than two months a Standard & Poors downgrade, also to junk status, in January. The Fitch ratings agency still shows Cyprus one notch above junk level.
The Moody’s reduction left Cyprus with a Ba1 rating, from Baa3, and a “negative” outlook, which means it could be downgraded further, according to a statement released by the ratings agency this morning.
The downgrade had been a risk for Cyprus since early November, when Moody’s said it was reviewing Cyprus’s status.
In its statement, Moody’s said the “key drivers” behind the downgrade decision were the “increased risk that the Cypriot government would have to provide renewed financial support to the country’s banks because of their exposure to the Greek government and economy, and the commensurate impact of such measures on the government’s own financial strength”, as well as “the likely impact on market confidence in Cyprus stemming from these banking-sector concerns, as well as broader uncertainties about Europe’s macroeconomic prospects and institutional frameworks”.
“Overall, the fragile market confidence in Cyprus, which has already led to a loss of access to international debt markets, is likely to continue, with a high potential for further shocks to funding conditions for the sovereign and the domestic banks,” Moody’s said.
Third largest in Med
Cyprus is the third-largest island in the Mediterranean and politically divided, with its northern third under the control of neighbouring Turkey.
Last month, the number of properties sold in Cyprus fell 26% compared with the same month a year earlier, after having risen in January for the first time in nineteen months, according to Cyprus Property News, which has been chronicling the market’s recent travails.
One of the few pieces of good news about Cyprus was the discovery, announced in December, of substantial deposits of natural gas just off the island’s coast. However, experts say that it will be years before the financial benefits from the find will begin to flow into the Cypriot economy.