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Cyprus: Measures will reduce impact of Covid-19 on banks says Moody’s

A government financial support package is expected to help limit coronavirus-related impact on banks’ asset quality, Moody’s ratings agency has said.

The financial support package of €700m is equivalent to 3 per cent of GDP, of which €450m are fiscal measures and €250m liquidity support with no fiscal effect on government finances.

“We expect the package, which includes financial support for affected businesses and households, in addition to ECB measures and potential Central Bank of Cyprus measures, to help limit the coronavirus-related impact on banks’ asset quality and profitability,” Moody’s said.

Financial support for affected businesses and households aims to limit unemployment and help maintain domestic consumption, and support tourism during the peak summer months and to extend the tourism season beyond October.

Slower economic activity amid the coronavirus crisis coupled with measures such as stricter travel requirements and restrictions, and closures of non-essential businesses are credit negative for banks, the agency said.

The virus-related economic slowdown adds to banks’ existing asset quality and profitability challenges amid weaker lending activity, fewer fee-generating transactions, and the higher cost of credit.

Cyprus’ financial support package aims to limit the longer-term negative economic effects on the economy by supporting affected businesses so they remain viable, limiting layoffs and maintaining consumption.

“These measures, in conjunction with efforts to arrest the spread of the virus and, perhaps, warmer weather in the spring and summer, will likely allow economic activity to gradually pick up in the second half of the year,” Moody’s said.

The full extent of the economic costs and effect on banks will be unclear for some time however.

The longer it takes for the spread of the virus to peak, and for households and businesses to resume normal activity, the greater the economic effect and the more severe consequences for banks’ loan quality and profitability.

The government’s measures aim to quickly stop the spread of the coronavirus, to financially support tourism-related businesses to remain viable in the short-term and to jump-start tourism to resume and rebound during the peak summer months, and extending the tourism season beyond October.

“How successful the measures will be is unclear for tourism, because it also depends on how quickly the virus’ spread abates, particularly in the UK and Russia, which account for more than half of tourist arrivals in Cyprus.”

Weaker economic growth, increased uncertainty in the next few months and reduced risk appetite mean that planned problem loan sales for 2020 will be more difficult.

This is likely to stall any material improvement in the bank’s asset quality metrics and credit profiles, which otherwise would have countered potential deterioration from the coronavirus.