Reuters: US Dollar Report: Fitch Places Cyprus on Rating Watch Negative

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Fitch Places Cyprus on Rating Watch Negative Mar 26th 2013, 17:32 Tue Mar 26, 2013 1:32pm EDT LONDON, March 26 (Fitch) Fitch Ratings has placed Cyprus's Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'B' and Short-term IDR of 'B' on Rating Watch Negative (RWN). At the same time, the agency has revised the Country Ceiling to 'B'. KEY RATING DRIVERS The RWN reflects Fitch's opinion that the shock resulting from the systemic failure of Cyprus's banking system will have profound negative implications for the domestic economy, which heightens the risk to public finances. This is notwithstanding the fact the Cyprus has agreed an outline programme with its official creditors. This programme improves the sovereign's near-term position from both a liquidity perspective (official funding amounts to EUR10bn, or 55% of GDP) and a solvency perspective. The decision to bail-in depositors rather than government bondholders represents a significant upfront saving for the sovereign. It also underscores the de facto seniority of claims on the sovereign relative to other claims on the country and consequently acts as a support factor for sovereign creditworthiness. Fitch has revised the Country Ceiling to 'B' for Cyprus, which effectively imposes a cap on the ratings of all issuers and transactions domiciled in Cyprus. Fitch had previously assigned the eurozone common Country Ceiling ('AAA') to Cyprus reflecting the prohibition within the currency union on restrictions on cross-border movement of capital. However, the closure of all Cypriot banks last week, along with the likely continuation of deposit transfer restrictions this week represents a de facto imposition of capital controls in Cyprus. RATING SENSITIVITIES Fitch will seek to resolve the RWN once further key details of the programme have been agreed and made public, taking into consideration the following key factors: - The medium-term economic and fiscal assumptions of the EU/IMF programme, in conjunction with Fitch's own expectations. - The terms of the official financing and projected fiscal sources and uses over the medium term. - The evolution and effect of capital controls in Cyprus. - The authorities' ability and willingness to implement the deep structural and fiscal reforms that are likely to be required under the programme. If the programme has incorporated a sufficient funding buffer against fiscal/economic slippage and is based on conservative assumptions, the IDRs could be affirmed at their current level of 'B' given that the rating already reflects a heightened risk to solvency. Conversely, if the programme appears fragile from the outset, the higher risk of it going off track could warrant a downgrade. In its assessment of the relevance of the assumptions within the programme and in its own financial projections, Fitch will focus on the impact of the banking system's failure on future economic growth and the implications for asset quality within the recapitalised but smaller banking sector. Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood of leading to a rating upgrade in the near term. Much further in the future, the realisation of significant off shore gas and oil reserves could significantly help the financing of fiscal deficits and place upwards pressure on the rating. While the authorities claim government revenues to range between EUR18.5bn (102.9% of GDP) to EUR29.5bn (164.1% of GDP) in Block 12 alone, the economic viability of extraction remains uncertain and beyond the horizon of the programme. KEY ASSUMPTIONS There is considerable uncertainty over the near- and medium-term evolution of output, unemployment and the government deficit. The pressure on banks to de-lever over the medium term is expected to exert considerable pressure on the economy with knock on effects to public finances. Should the current banking sector instability result in a prolonged breakdown in the domestic payments system, this would lead to a surge in corporate bankruptcy and drive a deeper GDP contraction. However, it is Fitch's expectation that the residual banking system will be promptly capitalised and that capital controls will seek to allow depositors to access funds for consumption and to pay suppliers. Fitch assumes that the details of the programme will be agreed between the government and the EU/IMF and be ratified in parliaments of creditor countries over the coming weeks. The agency expects that these details will be consistent with the outline agreement signed yesterday, notably with official financing limited to EUR10bn. Fitch has not factored privatisation receipts into its public debt projections, nor possible hydrocarbon receipts in the long term; these therefore represent an upside risk. Fitch does not anticipate social unrest to a degree that could derail the political implementation of the agreed programme. Fitch assumes that there is no materialisation of severe tail-risks to eurozone financial stability that could trigger a sudden and material increase in investor risk aversion and financial market stress. Contact: Primary Analyst Enam Ahmed Director +44 20 3530 1624 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Douglas Renwick Senior Director +44 20 3530 1045 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Sovereign Rating Methodology' dated 13 August 2012, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Link this Share this Digg this Email Reprints

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