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Cyprus’ credit ratings returned to investment grade

Five years after the bail-in agreement and the enforcement of the Economic Adjustment Program that compelled Cyprus into turning a page, the island is now expecting to record a 2.7 per cent fiscal surplus this year compared with a target of 1.7 per cent in the April 2018 Stability Programme Update. Indicative of the country’s positive performance is the fact that it recently returned to the investment grade, following evaluation by some of the most important credit rating agencies.

First, Standard & Poor’s (S&P) upgraded Cyprus’ sovereign rating back to investment grade after rating it junk for more than six years. Subsequently, a month later Fitch Ratings upgraded the country’s sovereign rating to investment grade, ‘BBB-‘ from ‘BB+’, with a stable outlook.

In its statement explaining the upgrade, S&P said that the Cypriot authorities by carving out the bad assets of the Co-op had paved the way for a significant reduction in the banking sector’s nonperforming assets even though it came at a cost of 15 per cent of economic output. Moreover, Fitch Ratings noted that the upgrade reflected the buoyant fiscal revenue and prudent fiscal policy and added that the island’s public debt will remain on a firm downward trajectory.


The news of the upgrade was welcomed by the Government which said that the return to investment grade justifies the efforts of the past five years. President, Nicos Anastasiades, tweeted after S&P’s announcement that “The return after 6.5 years to investment grade is the strongest confirmation of the prudent management that we followed and continue to follow”.

On his part, Finance minister, Harris Georgiades, said that one of the most important economic policy objectives has been achieved and tweeted that “The growth perspective is reinforced. Our country is financially shielded. The difficult decisions we were called upon to take are being justified”. Following Fitch upgrade, Mr. Georgiades thanked everyone for their contribution.


Both agencies referred extensively to the acquisition of the Co-op’s healthy operations by Hellenic Bank and the transfer into an asset management company of a non-performing loans portfolio of €5.7.

S&P noted that it “will significantly reduce the banking sector’s NPEs [non-performing exposures] to an estimated one-third of total loans from one-half before”. The rating agency added that it also expects that various other legislative changes “will support Cypriot banks’ efforts to further reduce bad assets over the medium term. We assume additional support to the banking sector via the government’s balance sheet from now through 2021 will be moderate”. Fitch underlined that this move will support a substantial decrease in contingent liabilities stemming from the banking sector.

S&P forecast that the Cypriot economy will continue to grow at a solid pace through 2021, enabling the government to alleviate its debt burden. They note that the ratings on Cyprus are constrained by the economy`s high indebtedness reflected both in its public and private balance sheets, the still-high proportion of NPEs in the banking system, and Cyprus` small size relative to other eurozone member states. The rating agency projects that the Cypriot economy will grow by 4% in 2018 and by 3% on average between 2019 and 2021. Real GDP growth by 4% in 2018, will allow a return to the economy’s 2011 pre-crisis size.

The upgrade will allow banks to use Cypriot government securities for the monetary operations of the European Central Bank, which announced recently that it will end its expanded asset purchasing programme, widely known as quantitative easing or QE, by the end of the year.

It is worth noting that S&P was the first credit rating agency to downgrade Cyprus’ sovereign credit rating to a non-investment grade rating in January 2012. Nevertheless, within the next two years another rating upgrade could be possible if debt levels continue to fall or if improvement of the banking sector, especially considering the NPLs, improve.