Fitch Ratings Co. downgraded Cyprus to below investment grade, cutting it to BB+ from BBB- as the country negotiates international aid for its troubled banks with both the European Union and Russia.
“Cypriot banks will require substantial injections of capital in order to secure confidence in their financial viability,” Fitch said today in a statement. The company estimated the cost at as much as 6 billion euros ($7.5 billion).
Following the Fitch move, Cyprus is now rated junk by all three major rating companies. It’s rated Ba3 by Moody’s Investors Service and BB+ by Standard & Poor’s. Cypriot lenders risk losing access to European Central Bank funding.
A spokesman for the Nicosia-based Central Bank of Cyprus declined to comment in response to a question on access to the ECB.
“The Republic of Cyprus has both national and European tools in its disposal to fully protect the sound operation of the financial system and to further deal with the economic challenges of today,” the Finance Ministry said in an e-mailed statement today.
The island’s government remains committed to meeting fiscal targets, to securing the necessary funds to meet the state’s financing requirements and effectively manage the challenges of the banking system in cooperation with the central bank, the statement said.
Fitch said that the government may miss this year’s fiscal target as the deficit may widen to 3.9 percent of the economy.
The east Mediterranean island, which is the euro area’s third-smallest economy, may see its debt climb to more than 100 percent of gross domestic product, Fitch said. Public debt soared from 61.5 percent in 2010 to 71.6 percent last year.
Stefanos Stefanou, spokesman for the Cypriot government, which has requested aid from third countries, including Russia for a bilateral loan, said on June 20 that Cyprus is in talks with the EU.
“We are in continuous touch and dialogue with the European partners and EU’s institutions and work simultaneously in the direction of securing a bilateral loan from another country,” Stefanou said in a statement on the website of the Press and Information Office.
The Cypriot president, Demetris Christofias, who opposes austerity measures as condition of a rescue agreement, invited political party leaders to his official residence tomorrow afternoon to discuss the economy.
The EU is pressing Cyprus to seek a fully fledged rescue program of as much as 10 billion euros that comes with a range of economic and financial-sector conditions. Cyprus has sought to minimize conditions and focus any aid on its banks. Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, said on June 21 that Cyprus has “serious imbalances.”
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