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Fitch downgrades Cyprus debt to 'BB-'  Join our daily free Newsletter

MENAFN - AFP - 21/11/2012

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(MENAFN - AFP) The credit ratings agency Fitch downgraded on Wednesday debt issued by eurozone member Cyprus by two notches, from "BB" to "BB-" and said the outlook was negative, which means it could be cut further.

"The downgrade of Cyprus's sovereign ratings reflects the materially weaker macroeconomic outlook, a fiscal budget that has significantly underperformed expectations and the continued high level of uncertainty over the costs associated with bank recapitalisation," a Fitch statement said.

The rating for Cyprus, which currently holds the European Union's rotating presidency, was initially cut to speculative, or junk, status by Fitch five months ago.

A "delay in negotiating official support has contributed to the deteriorating economic conditions and raised uncertainties about public sector reform and the correction of macroeconomic imbalances," Fitch warned.

"The government's short-term financing flexibility has also been materially reduced with the its current dependence on bank financing to meet its funding needs," the agency added.

On Friday, another rating firm, Moody's, said it would review Cyprus for a possible downgrade just five weeks after its last cut.

Cyprus asked for a European Union (EU) bailout in June, but those negotiations only began in mid-November.

A troika of international lenders -- the EU, the European Central Bank and the International Monetary Fund (IMF) -- are trying to determine with Cypriot authorities the extent of public-sector cuts required in return for financial aid.

A Cypriot presidential election scheduled for February 17 has raised the risk of delays in agreeing to terms of a rescue program and disbursement of aid until late in the first quarter of 2013.

Cyprus has been unable to borrow from international markets since last year when credit rating agencies first cut its sovereign rating to junk status.

The country's economy fell into its second recession in less than two years in mid 2011, and business activity contracted by 2.3 percent in the third quarter of 2012 on a 12-month basis, the sixth consecutive quarter of shrinkage.

The finance ministry predicts that gross domestic product (GDP) will contract by 2.2 percent in 2012, which is mildly lower than the European Commission's 2.3 percent forecast.

Fitch estimated that Cyprus would "remain in recession into 2014," and added that "the lack of a clear and credible programme to tackle the fiscal and macroeconomic challenges has negatively impacted business and investor confidence."

In deciding on a negative outlook for the country, Fitch pointed to "risks associated with bank recapitalisation costs, the short-term financing situation, progress towards a deficit and debt reduction programme and intensification of the eurozone crisis, notably further contagion from Greece," which is also in talks with the troika on financial aid.

The downgrade was the second this week for a eurozone country, after Moody's cut France's top rating by one notch to "Aa1" owing to structural problems with the French economy which made it harder to compete on a global level.

Moody's also noted that Paris could face fiscal issues in the future and that it was exposed to demands for financing from heavily-indebted eurozone partners, such as Cyprus and Greece.


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