* Ratings agency downgrades Cyprus two notches to BB-minus
* Fitch says credit outlook negative
* Banks in Cyprus battered by Greek debt crisis
By Daniel Bases
NEW YORK, Nov 21 Fitch Ratings downgraded Cyprus
by two notches on Wednesday and pushed it further into junk
territory, assigning a BB-minus credit rating because of its
weaker macroeconomic outlook.
The credit outlook remains negative, Fitch said in a
"The downgrade of Cyprus's sovereign ratings reflects the
materially weaker macroeconomic outlook, a fiscal budget that
has significantly underperformed expectations and the continued
high level of uncertainty over the costs associated with bank
recapitalization," Fitch said.
Cyprus is trying to negotiate with the European Commission,
European Central Bank and the International Monetary Fund on a
bailout package, with sticking points over how much is needed to
recapitalize Cypriot banks, privatizations and pension cuts.
Cypriot banks were battered by their exposure to the
debt-crippled Greek economy. The delay in negotiating a deal,
with resistance to reforms, Fitch said, only serves to increase
the risk to Cyprus's medium-term fiscal and economic health.
"The delay in negotiating official support has contributed
to the deteriorating economic conditions and raised
uncertainties about public sector reform and the correction of
macroeconomic imbalances," Fitch said of the European Union
Standard & Poor's has Cyprus on watch for a downgrade and
holds the rating two notches below Fitch at B. Moody's Investors
Service has Cyprus also on review for a downgrade with a rating
of B3, which is three notches below Fitch.
In its analysis, Fitch highlights a deterioration in
Cyprus's fiscal deficits, with an expectation it will be more
than 5 percent in 2012 versus an April assessment from the
government of 2.6 percent of gross domestic product.
"This is despite austerity measures, including wage freezes
and an increase in VAT (Value Added Tax) by 2 percentage points
to 17 percent," Fitch said.
Fitch believes, as a baseline scenario, the general
government debt to GDP will peak at roughly 120 percent in 2014,
up from 71.1 percent last year. The bulk of that increase is
likely due to recapitalizing the banking system.
"The three main Cypriot banks will need at least around a
further 4 billion euros (22 percent of GDP) in addition to the
1.8 billion euros already injected into Cyprus Popular Bank in
2012," Fitch said.
Fitch said its rating is predicated on the expectation that
the Cypriot authorities will reach agreement with the European
Commission, European Central Bank and the International Monetary
Fund on an official financing program.