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Published: Thursday June 14, 2012 MYT 7:05:00 AM
Updated: Thursday June 14, 2012 MYT 7:08:29 AM

Moody's cuts Spain's debt rating and Cyprus' sovereign rating


NEW YORK: Moody's Investors Service cut its credit ratings on Cyprus' sovereign debt by two notches on Wednesday, citing rising risks of a Greek exit from the euro currency and an already strained fiscal position.

The speculative grade credit for the European Union member, which is third-smallest economy in the euro zone, is also on review for further downgrade, Moody's said in a statement.

Cyprus, most of whose population is Greek Cypriot, has close cultural, business and political links with Greece. But that relationship has not been without difficulties as Greece's economy has crumbled.

The weak credit position is exacerbated by limited access to international markets, Moody's said.

Moody's rating cut, to Ba3 from Ba1, takes into account a new assumption that Cyprus will need to contribute capital support to its banking system in excess of a prior estimate of 5 to 10 percent of gross domestic product.

On Tuesday, Moody's cut the credit ratings on two Cypriot banks and put them on review for possible further downgrade because of the rising risks of a Greek exit from the euro zone. A third bank's rating was held but also put on review for downgrade.

Greece goes to the polls on Sunday, June 17 to vote in parliamentary elections after an inconclusive outcome in May. That previous election raised the possibility that a new government could backtrack from an agreement with European partners for a 130 billion euro bailout package.

A bigger risk of a euro exit by Greece could lead to faster withdrawals of deposits from Cypriot banks' Greek branches, thereby straining liquidity. If there were to be an exit, a redenominated Greek currency would likely trigger a default in Greece that "would materially weaken" the solvency of Cyprus' banks, Moody's has said.

Cyprus is rated BB-plus with a negative outlook by Standard & Poor's, two notches above Moody's new rating. Fitch has Cyprus at investment grade, albeit one notch away from junk status at BBB-minus, also with a negative outlook.

Moody's also slashed Spain's debt ratings three notches

Credit ratings agency Moody's Investors Service cut its rating on Spanish government debt on Wednesday by three notches to Baa3 from A3, saying the newly approved euro zone plan to help Spain's banks will increase the country's debt burden.

Moody's, which also said it could lower Spain's rating further, cited the Spanish government's "very limited" access to international debt markets and the weakness of the national economy.

The rating is on review for possible further downgrades, which could come within the next three months, Moody's said.

"We will of course also take into account whatever the details are that come out on the size and the terms of the (bank) support package, and also take into account what's going on in the wider euro zone" in weighing further downgrades, said Kathrin Muehlbronner, a Moody's analyst in London.

That includes both Sunday's election in Greece and an upcoming European summit at the end of the month, she said.

A spokeswoman at Spain's Economy Ministry in Madrid declined to comment.

"The Spanish economy's continued weakness makes the government's weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years," Moody's said in a statement.

Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125.74 billion) to shore up its teetering banks, and Madrid said it would specify precisely how much it needs once independent audits are completed in just over a week.

"In our view, that's (the aid request) not a sign of strength, that's a sign of weakness," Muehlbronner added, noting the Spanish government's growing dependence on its domestic banks as buyers of sovereign debt.

"We do see an increasing risk of Spain needing to ask for more support in the coming months or in the coming years," she said.

Moody's now puts Spain's rating one notch above junk status. Standard & Poor's rates Spain two notches higher at BBB-plus with a negative outlook. Fitch Ratings cut Spain's rating by three notches on June 7 to BBB - one notch above Moody's - and put a negative outlook on the credit.

($1 = 0.7953 euro) - Reuters

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