Standard & Poor's Cuts Cyprus Long-Term Credit Rating

Standard & Poor's Ratings Services said it has lowered its long-term sovereign credit rating on the Republic of Cyprus to 'BBB+' from 'A-'. At the same time, it affirmed the short-term sovereign credit rating at 'A-2'. The outlook on the ratings remains negative.

"We believe the Cypriot government will struggle to meet its 2011 general government deficit target of less than 4% of GP...This, in turn, will likely increase the government's debt burden, which we currently expect will be 80% of GDP at the end of 2011," said S&P's.

Such a substantial rise in general government debt is likely to reduce government's ability to support its domestic banking sector, which in is vulnerable to the potential restructuring of government debt in Greece, said the ratings agency.

"Between 2008 and 2010, Cyprus' general government budgetary position shifted from a surplus of just under 1% of GDP to a deficit of 5.3% of GDP. Government personnel expenditures continue to make up a high proportion of total spending (25%). Prospects for passing personnel and benefit cuts through parliament are uncertain, however, not least due to the influence of public sector unions. Reforms aimed at introducing public-sector workers' contributions to their pensions and increasing the age of retirement are also facing delays," said S&P's.

The ratings agency forecasts the current account deficit at just below 7% of GDP at end-2011 and says this could be higher due to the impact of the explosion damage to Vasiliko power station.

This is the second cut this week after Moody's downgraded Cyprus' bond ratings and two largest banks. Earlier today, government spokesman Stefanos Stefanou said that ratings cuts do not mean that the economy is on the edge of a cliff, and that an article in the Financial Times saying that Cyprus may need a bailout from the EU was written "with an agenda" to show that the island's communist president does not understand economics.

Proposed measures to reduce public spending and implement pension reform have been further postponed after the president called for the Cabinet to resign pending a reshuffle in the wake of the explosion at Mari naval base and a backlash from coalition partner DIKO, which expressed anger at delays in economic austerity measures.