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Moody’s Anticipates Increase In Cyprus Coronavirus-Related Debt To Be Transitory

Moody’s Anticipates Increase In Cyprus Coronavirus-Related Debt To Be Transitory

Moody’s Rating Agency published yesterday a report on Cyprus’ credit and debt profile, stating that “The credit profile of Cyprus (Ba2 positive) reflects its small but wealthy economy, improved economic resilience and the government's fiscal outperformance in the wake of the country's banking crisis, Moody's Investors Service said in an annual report today.”

 

However, the report went on to say that Cyprus will face several credit challenges due to a relatively undiversified economy, as well as the high levels of amassed debt in government, nonfinancial corporates and households. Furthermore, Moody’s expects debt to spike in the remainder of 2020 as a result of the pandemic.

 

"We expect that Cyprus's debt reduction will resume at a sustained pace after the 2020 coronavirus crisis," said Sarah Carlson, a Moody's Senior Vice President and the report's author. "At this point, we anticipate that the increase in debt related to the coronavirus will be transitory, partly because of Cyprus's large fiscal surplus going into the pandemic."

 

Although the government's fiscal position will improve significantly from 2021, Moody's does not expect a return to sizeable surpluses over the next few years.

 

Considering the Cyprus rating and outlook, Moody’s considers medium-term debt trends and banking sector issues to be the drivers. The rating and outlook will further improve if non-performing exposures (NPEs) were to fall substantially and there’s a reduction contingent liability risk.

 

The credit profile could weaken if growth or fiscal policy decisions were to cause a prolonged reversal of the supportive fundamental debt trend. Failure to decrease the stock of NPEs in the banking sector would also be negative. The outlook could move back to stable if Moody's were to conclude that the coronavirus will have a long-term impact on economic strength and fiscal prospects.

 

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