S&P puts Cyprus on CreditWatch Negative

Standard & Poor's Ratings Services said Friday it placed its BBB+ long-term and A-2 short-term sovereign credit ratings on Cyprus on CreditWatch with negative implications."We believe the fiscal position of the Cypriot government is no longer sustainable," S&P said in a statement received in Nicosia, just two days after Fitch Ratings said it expected the country would probably need an EU bailout. "Due to the departure of the junior coalition party, DIKO, the Cypriot government is, in our opinion, in a weaker position to pass emergency budgetary measures through parliament," a statement said."While we expect a package aimed at consolidating public finances and enhancing economic growth to be introduced on August 25, we remain uncertain as to the extent and efficacy of these measures. In particular we question whether, without more extensive expenditure cuts including to public sector payrolls, the government can meet next year's ambitious 2.5 percent of GDP general government deficit target." S&P said the government has gross financing needs of about five percent of GDP (900 million euros) for the rest of 2011, with fiscal reserves amounting to 2.2 percent of GDP, and maturing debt over the rest of the year, which is held by resident financial institutions, at 1.7 percent."If the latter is rolled over, new borrowing of just over one percent of GDP will need to be secured before year-end. Then, in the first few months of 2012, maturing government debt is projected to reach more than 6 percent of GDP." New Cypriot Finance Minister Kikis Kazamias said on Thursday he believes Cyprus can meet its financing needs and that the government would would turn to the domestic market for refinancing.Yet S&P said that, "in our opinion the appetite of resident institutions to refinance existing, and buy new, government debt depends on the passage of a credible, expenditure-led fiscal plan, as well as on the strength of the institutions' own finances. But a number of Cypriot banks are heavily burdened by Greek debt, and S&P said the "banking system's capacity to absorb shocks emanating from a further deterioration in Greece's public and private creditworthiness is not unlimited. "Based on official comments, we believe that uncertainties remain over the timing and participation rate of the private sector in the planned bond exchange of Greek sovereign debt. This makes it difficult to estimate the potential for additional capital needs of the Cypriot financial sector, and how these might weigh on government finances." S&P said it is now waiting to evaluate the "minority government's plans to address its economic challenges and as details of the planned bond exchange of Greek sovereign debt become clearer."Should the parliament approve of a credible budgetary consolidation package consistent with the 2012 general government deficit target of 2.5 percent of GDP before month-end, and if potential losses associated with the restructuring plans of Greek sovereign debt remain at current anticipated levels, we could affirm our 'BBB+' long-term foreign currency and 'A-2' short-term ratings on Cyprus.""On the other hand, in the absence of what we view to be a timely and credible fiscal adjustment, which we think is likely to require significant expenditure cuts, or if the proposed Greek restructuring package results in losses to Cypriot banks higher than are currently anticipated, we could lower the rating."