Nicosia.- (CNA) – – Fitch Ratings downgrading of Cyprus government bonds on Friday once again proves that the key problem faced by Cyprus is the recapitalisation of its banking sector, Government Spokesman Stephanos Stephanou said on Saturday.
In statements to the press, Stephanou said that the signing of the loan agreement with the European Stability Mechanism is delayed due to the fact that the amount of the banking sectors’ recapitalisation needs has not been established yet.
He also said that the Central Bank of Cyprus is making efforts to convince international lenders that the amount needed for the recapitalisation of the banks is smaller than what some circles abroad have decided in advance.
Fitch Ratings has downgraded the Republic of Cyprus` government bonds to `B` with a negative outlook.
In a press release issued Friday, the agency says that the downgrade of Cyprus` sovereign ratings partially reflects the agency`s view that the size of the government support to the banking sector is likely to be higher than previous Fitch estimates, which mainly focused on the three largest banks.
“Uncertainty regarding the capital needs of the cooperative banks remains. Including the latter, the total recapitalisation costs of the banking sector could be up to EUR10 billion, although Fitch anticipates that this figure may include a degree of headroom”, the statement reads.
Moreover Fitch notes that this “would increase the size of the necessary official support programme for the Cypriot sovereign to over EUR17 billion. In this scenario Fitch forecasts that government debt to GDP would jump to over 140% in 2013”.
Cyprus’s `B` rating is supported by Fitch`s expectation that the Cypriot authorities will reach agreement with the Troika on an official financing programme before 3 June when a EUR1.4 billion bond redemption is due, thereby removing any near-term risk of a payment default.
Excluded from the international capital markets since April 2011, Cyprus applied on June 25 for financial assistance after its two largest banks sought state support following massive losses as a result of the haircut of the Greek sovereign debt.
The Cypriot programme is estimated to reach 17.5 billion euro, which practically equal to the island`s GDP. The Cypriot authorities and the Troika have agreed on a four-year adjustment programme providing for measures totalling 7.25% of GDP (1.29 billion euro) for the period of 2012-2016. The Cypriot package cannot be agreed as capital needs of the banking sector have yet to be determined.
The Members of the Independent Committee on the future of the Cypriot banking sector will have a meeting with Troika (IMF, EC, ECB) representatives in mid February, in Brussels.
According to CNA sources, during the meeting the Committee will discuss several issues related to Cyprus’ banking sector and will be briefed on Troika’s estimations about issues linked to the banking sector in a possible Memorandum of Understanding between the international lenders and the Republic of Cyprus.
Prior to that meeting, the members of the Independent Committee will have a meeting in London with experts, who have conducted a similar study on the banking sector, in order to exchange views and hear their experiences.
According to the same sources, last week, the members of the Committee visited Cyprus in order to continue their contacts that began in November 2012 with various stakeholders and regulatory authorities who have or had a role in the activities of the banking sector.
Among others, the Committee met with members of the Cyprus Chamber of Commerce and Industry (CCCI) and representatives of the consumers’ associations. In addition, they met with Banks’ Internal Auditors and representatives of the Ministry of Finance.
Those meetings, according to a reliable source, were very useful for the Members of the Committee because they will help them to reach conclusions and provide suggestions on how to increase growth, competitiveness and stability of the Cypriot banking sector.
The Committee, which was launched in November 2012, expects to produce an interim report in mid 2013 and a final report in November 2013. Both the interim and the final report will be published, while the final report will be handed over to the Governor of the Central Bank.
David Lascelles has been appointed chairman of the Commission and David Green, George Charalambous and Pierre de Weck are members. Cyprus applied for a bailout on June 25, 2012, after its two largest banks turned to the state for financial assistance having sustained a severe hit due to their heavy exposure to Greek bonds.
Government Spokesman Stephanos Stephanou said on Thursday that it was obvious that there were selfish interests behind the blows sustained by Cyprus regarding its economy.
Stephanou noted that “the attackers want to take on Cyprus` role as a very serious, international financial and investment centre,” adding that the government has strengthened Cyprus` position as an investment centre over the past few years and will defend this role.
“We will defend this role because Cyprus` economy is gaining and has much to gain from this investment policy,” Stephanou said and assured that the government would continue to give answers with concrete data concerning allegations about money laundering and foreign and Cypriot investments.
He said “we have many arguments and international reports that prove that no money laundering is going on in Cyprus.”