Fitch puts Cyprus rating on watch for downgrade

Fitch said Tuesday it had put Cyprus's credit rating on watch for a possible downgrade as the restructuring of its banking system would hurt the economy and public finances despite an EU-IMF bailout. The decision "reflects Fitch's opinion that the shock resulting from the systemic failure of Cyprus's banking system will have profound negative implications for the domestic economy, which heightens the risk to public finances," it said in a statement. Fitch currently rates Cyprus as 'B', only two notches above levels where the agency considers borrowers vulnerable to default. The bailout of 10 billion euros ($13 billion) agreed on Monday was supposed to help ensure that the Cypriot state doesn't default. However the rescue was made contingent on closing down the country's second largest lender, Laiki (Popular Bank), while the biggest, Bank of Cyprus, will be restructured radically with large depositors being forced to contribute. Analysts have expressed concern that the radical downsizing of the banking system and the expected flight of Russian deposits that made up around a third of the total will lead to a severe recession that will end up jeopardising the government's finances. Fitch said it will decide on Cyprus' sovereign rating once the details on the bailout package become clear. If the programme has a sufficient funding buffer against fiscal and economic slippage then it could uphold the B rating, otherwise it would likely downgrade Cyprus, the agency said. Fitch said its analysis will also "focus on the impact of the banking system's failure on future economic growth." With banks still closed in Cyprus, Fitch warned that should a prolonged breakdown in the domestic payments system develop this would lead to a surge in bankruptcies and drive a deeper economic contraction.