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Moody`s rating agency has upgraded government bond ratings of Cyprus by one notch, to Ba3 from B1, a move Nicosia has welcomed. Moody's maintained a positive outlook and said the short-term ratings have been affirmed, at Not Prime (NP) and (P)NP. 

Commenting on the rating action, Government Spokesman Nicos Christodoulides told CNA that the upgrade of Cyprus by Moody`s, "is another step in restoring confidence in our economy and another confirmation that we are now on a path that creates a positive outlook." 

The government, he pointed out, will continue with the same serious policy. 

The fact that Moody’s maintained the prospects of the Cypriot economy on a positive outlook means that it will probably proceed with a new credit rating upgrade in the next assessment of Cyprus in November. Cyprus is now three upgrades away from the investment grade of Moody’s. 

According to Moody’s, the key drivers for the rating action are improvements in economic resilience that have occurred over the past two years and that seem likely to continue in the medium term, as well as the consistent fiscal outperformance and continuing favourable fiscal outlook for Cyprus. 

The decision to maintain a positive outlook on the rating of Cyprus reflects Moody`s view that improvements in economic resilience and continuing fiscal outperformance are likely to be sustained, with a reduction in the debt-to-GDP ratio as well as a fall in the stock of non-performing loans held by the banks. 

The long-term country ceilings for foreign-currency and local-currency bonds have been raised to A3 from Baa1, to reflect continuing improvements in economic resilience and fiscal outperformance, and the long-term ceiling for foreign-currency and local-currency deposits has been raised to A3 from Baa1. 

Moody`s maintains a six-notch gap between the government bond rating and the bond and deposit ceilings. The short-term foreign-currency bond and bank deposit ceilings remain unchanged at P-2. 

Moody’s also notes that the government bond ratings of Cyprus would be upgraded were Moody`s to conclude that a combination of government policy and sustained investor and consumer optimism was very likely to result, over time, in a sustained and marked fall in the debt-to-GDP ratio of Cyprus and in the stock of bank non-performing loans. The expectation that growth would be sustained at current levels over the coming years would also be credit positive. 

Downward pressure upon the government bond ratings of Cyprus might emerge if Moody`s were to conclude that the government commitment to restoring macro-financial stability had weakened, particularly in the context of a lower growth environment. Evidence that the banking sector needed further recapitalisation would also exert downward pressure upon the rating.

Source: Stockwatch