Brussels, 05/06/2013 (Agence Europe) - On Monday 3 June 2013, the Fitch credit rating agency downgraded Cyprus's long-term debt by one notch, flagging up “negative prospects”. Fitch was following its competitors, Moody's and Standard & Poors, which downgraded the island's sovereign debt by a notch in March 2013.
Fitch said it took the decision “due to the high implementation risks on the agreed programme and the restructuring of the banking industry”. “Fitch acknowledges that the programme improves the immediate position of the sovereign from both a liquidity and solvency perspective However, Cyprus has no flexibility to deal with domestic or external shocks and there is a high risk of the programme going off track, with financing buffers potentially insufficient to absorb material fiscal and economic slippage. A premature lifting of capital controls that triggers material capital flight could have large negative economic consequences.” Fitch says the troika of lenders' economic forecasts are optimistic when it comes to figures for the length of the recession, the scale of debt and unemployment. Figures published on Wednesday by the Cypriot statistics office show a 30% increase in unemployment from May 2012 to May 2013.
On Fitch's warning of the dangers of premature lifting of capital controls, a European source explained to this newsletter that the European Commission had been hugely criticised for not pressurising the Cypriot authorities to speed up the lifting of the restrictions on the movement of capital, saying that the current speed of easing of restrictions was correct and was being closely monitored by the Commission. The problem is to strike the right balance to ensure both financial stability and reduce the impact on the real economy. The same European source recognised that a large amount of capital had been removed given the measures in place. (EL/transl.fl)