Cyprus and its three main banks were downgraded in November 2011 by the three major credit ratings agencies, in no small part due to their exposure to the Greek debt crisis as well as the declining situation in Cyprus. This downgrade was followed by the publication of the banking sector’s January - September 2011 financial results, which revealed a write-down of nearly EUR 1.5 billion of Greek government bonds (GGB) by the Bank of Cyprus, Marfin Laiki and Hellenic Bank, as well as rising impairments due to non-performing loans (NPL) in the private sector.
The downgrade can be summarised as stemming from a declining macroeconomic and fiscal situation in Cyprus itself, as well as Cypriot exposure to Greece:
a. Cypriot banks are exposed to Greek government bonds (GGB), which must be written down by approximately 50% of their value in line with the private sector involvement (PSI) agreement of October 26th, 2011.
b. Cypriot banks are exposed to non-performing Greek private sector loans (Greek NPL). According to Moody’s, up to 20% of all Greek private sector loans may be classified as non-performing in the next 18 months.
c. Cypriot banks are also increasingly exposed to non-performing Cypriot private sector loans (Cypriot NPL), which have been hard-hit by the declining situation in the real Cypriot economy.
A further potential exposure is seen in the uncertainty surrounding the second Greek bail-out package, which is seen as essential to avoiding a hard default by Greece. A little-known fact of the first bail-out is that any country encountering economic difficulties, expressed in a higher bond yield, may opt out of further refinancing for Greece. With Italian and Spanish bond prices having breached 7% in December 2011, it is increasingly possible that neither these countries nor France will be in a position to raise money for Greece on the open market. This could yet lead to a potentially catastrophic situation.
This article explores the actual exposure of the Cypriot banking system to Greece, and reviews the next steps in the Greek and wider European debt crises.
View the complete article on the Navigator Consulting Group site (no registration required).