Over the last year international rating agencies have been depriving some EU countries of their investment attractiveness by cutting their credit ratings. Among those countries are Greece, Ireland, Spain , Portugal and Italy.
Another wave of panic among investors was raised by Moody’s as this rating agency had downgraded Cyprus’s sovereign rating by 2 levels at a time – form A2 down to Baa1. It means that the country’s T-bonds and other securities instantly turned into risky assets for investors.
Which EU countries are currently in the “credit risk zone’ and why?
The common European currency keeps losing its value while the yields of the risky bonds issued by Italy and Spain are growing. According to the experts of , such processes can be explained by the fears that the EU and global economy cannot solve the existing debt problems.
· Italy. Its economy is estimated at $2 trillion. Its sovereign debt has reached $2,45 trillion. Obviously Italy will be saved at the expense of other EU countries because it plays one of the key roles in the EU and eurozone’s economy.
· Ireland, Spain , Portugal , Greece. A couple of weeks ago the Irish T-bond yield grew up to 13,5%, which is a historical record. The Spanish T-bond yield also hit the record. On July 11th it reached the level of 5.8%, the highest level since 1997. In Portugal the 10-year T-bond yield rose to 13.2%. Greece is the frontrunner. Its bond yield is 17.2%.
Now it is Cyprus that has joined the company of risky economies. What is happening with the global economy? What country is next? These days credit ratings are only downgraded, thus affecting the investment attractiveness of the economies. The reasons for a rating cut can be different but the consequences are often the same – growing market uncertainty.
On July 27th Moody’s Investors Service downgraded Cyprus’s rating by 2 levels – from А2 down to Ваа1. The country’s short-term bond rating was also cut from Р-1 down to Р-2, with a negative forecast. The rating agency also made a negative forecast for Cyprus’s economy. According to Moody’s, in 2011 the country’s GDP is expected to show no growth while in 2012 it is expected to grow only by 0.1%.
According to the experts of , there is a game played in the market of the derivatives issued by Cyprus:
1. In Feb 2011 Moody’s cut Cyprus’s sovereign rating by 2 levels – from Aa3 down A2
2. In March 2011 Standard and Poor’s (S&P) deprived Cyprus of its “А” long-term rating by dropping it down to “A-”.
3. In May 2011 Fitch Ratings cut the country’s long-term rating from AA- down A-
4. Rating forecasts. All the forecasts were negative (a negative forecast means that the rating may be downgraded further).
The reasons for the latest rating cut
1. According to the official statement released by Moody’s, concerns over the consequences of the explosion at the country’s military explosive storage, which took place on July 11th, was the main reason for the rating cut. It should be noted that the devastating explosion killed 13 people and damaged the biggest local electric power plant, which satisfies 60% of the country’s demand for electricity, thus causing a real energy crisis in Cyprus. The president of the country’s central bank reported that after the explosion the economy was in a state of emergency and called on the authorities to take emergency action in order to avoid asking for external financial aid. The recovery work alone is said to cost €1B or 5.6% of the national GDP. Moreover, the energy crisis hit the island at the height of the tourist season, which will inevitably bring major losses to the island’s tourist industry and the entire economy of Cyprus.
2. While making a decision to cut Cyprus’s rating, Moody’s expressed doubt about the ability of the country’s financial system to withstand the escalating crisis in neighboring Greece. If Greece defaults on its debt, numerous Cyprus banks will find themselves on the verge of bankruptcy and will have to ask for governmental support. About 30% of the bank assets (€5B) belong to Greek banks or their affiliates. Besides, the country’s banks are some of the major holder of Greek bonds - €14B. On July 25th Moody's cut Greece’s rating to junk – 3 levels down - Caa1 to Ca, which is one step away from the minimal level C.
3. Another consequence of the explosion was a major political crisis in Cyprus. The opposition instantly started a series of protests, blaming the president and the government for being negligent and asking them to leave.
Rating cut: possible threats for Cyprus.
First of all any loans will be costlier for Cyprus:
1. The rating agencies will force the government to implement a series of structural reforms in the country’s social system and public sector. In other words, it’s about austerity.
2. Probably, the authorities will have to bail out several banks in order to make them less dependent on the Greek crisis.
3. There probably won’t be any major changes in the country’s taxation system because the authorities won’t ever want Cyprus to lose its status of “offshore heaven”, especially as rating cuts usually have almost no impact on the offshore business.
Market Leader and would appreciate it if you could participate in a survey. Please, visit the Academy’s forum and answer the question given below:
Should US rating agencies be trusted?
· Yes, they should. They perform an in-depth analysis for any certain country.
· No, they shouldn’t. They only aggravate the situation.
· Your own opinion
