* Cyprus default risk material and rising, dependent on aid
* Reprofiling of Greek support loan won't count as default
* Divided Italian govt could hurt reform drive
By Marc Jones
LONDON, Feb 20 Cyprus faces a "material and
rising risk" of defaulting on its sovereign debt, especially if
the euro zone and International Monetary Fund do not come up
with aid, rating agency Standard & Poor's said on Wednesday.
Crippled by its exposure to Greece, Cyprus needs 17 billion
euros ($23 billion) from the euro zone to recapitalise its banks
and to finance the government over the next three years.
S&P's comments come as the island gears up for a runoff
presidential election on Sunday pitting a conservative in favour
of a swift bailout deal against a Communist-backed candidate who
supports a bailout but with fewer harsh austerity measures.
"We see at least a one-in-three chance that we could lower
the Cyprus sovereign ratings again in 2013, for example if
official financial assistance from the (European bailout fund)
ESM and/or IMF is not forthcoming, leaving the Cypriot
authorities few choices apart from to restructure its financial
obligations," S&P's head of EMEA sovereign ratings Moritz
Kraemer said in a report.
"We could also lower the ratings if we believe the (Cypriot)
authorities are not able to fulfill the conditions that would be
attached to an official assistance programme."
S&P currently rates Cyprus at CCC+, well into non-investment
grade "junk" bond territory, with a negative outlook.
Economists warn a financial crash in Cyprus could reignite
the euro zone debt crisis. If the bloc does not come up with aid
the resulting default would blow a gaping hole in promises made
to investors that Greece's writedown last year was a one-off.
Cyprus asked for international aid eight months ago after
its banks suffered huge losses on exposure to the restructuring
of Greek sovereign debt and due to difficulties in accessing
international capital markets shut to it because of fiscal
slippage since mid-2011.
Its bid for aid has been delayed, however, by an incumbent
leftist government slow to negotiate bailout terms, by worries
among lenders over the island assuming a mountain of debt it may
not be able to afford to repay, and by German charges that
Cypriots are lax on tackling money-laundering.
Kraemer said that Greece, which S&P now rates at B- with a
stable outlook, was not facing another default for the time
being, and that any so-called "reprofiling" of its support
programme loans would not be classed as one by S&P.
"Subject to Greece meeting program conditions, we believe
that eurozone member states would contemplate further improving
official lending terms... This would be an effective write down
of the Greek public debt stock," he said.
There was also a warning that Italy's drive to improve its
finances could falter if elections this weekend result in a
government lacking the clout to force through economic reforms.
Confidence in Italy has been shaken in the run-up to
elections, after a strong campaign by former Prime Minister
Silvio Berlusconi that has opened up the three-way race with
Mario Monti and centre-left leader Pier Luigi Bersani.
It has threatened the prospects of a stable government
emerging after the vote, the last thing Italy needs as it
battles to repair an economy struggling after more than a decade
of stagnant growth.