FRANKFURT The European Central Bank said on Friday it was temporarily suspending the eligibility of Cyprus's debt for use in its refinancing operations.
The move, essentially a procedural measure, came after Cyprus said on Thursday it was launching a debt exchange swapping 1 billion euros of government bonds for new, longer-dated debt, to help the euro zone member meet one of the conditions of its bailout program.
In response to Cyprus's announcement on the debt exchange, Standard & Poor's downgraded the sovereign foreign currency credit rating on Cyprus to SD (selective default) from CCC.
S&P said that after the exchange, which is expected to occur on July 1, the liquidity strains on the government should be alleviated. After the exchange, the rating is expected to rise to CCC-plus.
The ECB move is likely to be temporary.
"The Governing Council of the European Central Bank (ECB) has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Republic of Cyprus for use as collateral in Eurosystem monetary policy operations," the ECB said in a statement.
"This decision takes into account the changes in the credit rating of the Republic of Cyprus as a result of the transactions announced by the Ministry of Finance of the Republic of Cyprus on 27 June 2013," it added.
"In line with established procedures, the Governing Council of the ECB will assess the potential eligibility of marketable debt instruments issued or fully guaranteed by the Republic of Cyprus again upon the conclusion of the above-mentioned transactions."
(Writing by Paul Carrel; editing by Andrew Roche)