Fitch Downgrades Cyprus 3 Notches; Banks Exposed To Greek Debt

   DOW JONES NEWSWIRES 
 

Fitch Ratings downgraded the Cyprus government's debt by three notches Tuesday, saying the small nation's comparatively big banking system is vulnerable to the debt crisis in nearby Greece.

The downgrade on long-term debt to A- from AA- "reflects the severity of the crisis in neighboring Greece and the risk this poses for the Cypriot banking system and consequently the public finances of Cyprus," Chris Pryce, director in Fitch's Sovereign Group, said in a press release.

The agency removed the sovereign rating from negative watch.

The euro showed little reaction to the Fitch downgrade. It was at $1.4380 at 0525 GMT, compared with $1.4375 before the news.

For the small economy with banking-system assets amounting to nine times gross domestic product, Cyprus's Greek exposure "is a significant source of vulnerability that has intensified with successive downgrades of the Greek sovereign since January," Fitch said. "Roughly one-third of the banking system's assets are booked as Greek exposure."

The three major Cypriot banks--Bank of Cyprus, Marfin Popular Bank and Hellenic Bank -- "are relatively well placed to absorb the impact of a sovereign debt crisis in Greece that entailed an assumed 50% haircut to face value of Greek government bonds," Fitch said.

But in a more severe scenario, in which "non-performing loans rose to 25%, Fitch estimates that the cost of recapitalizing the banks could rise to 25% of GDP, necessitating more extensive sovereign support." The government likely "would be willing and able to provide effective support to Cypriot banks in a stress test of this magnitude," but this "could materially alter the government's debt profile in a manner that would be negative for the sovereign ratings."

In the case of further difficulties, Fitch "believes that the European Central Bank would provide liquidity support in such an environment, thereby preserving financial stability in Cyprus."

-By William Mallard, Dow Jones Newswires; [phone]