“A thunderstorm is gathering over Cyprus,” says Joshua Chaffin in the Financial Times. The economy is struggling to deal with two severe shocks. One is unique to Cyprus: in July, a huge explosion caused by munitions stored at a naval base destroyed a power plant that provides more than half Cyprus’s electricity. The recriminations have plunged the government into a crisis. The other is a familiar story: its banks are heavily exposed to Greece, with Marfin Popular Bank having more than 40% of its loan book in the country. Banking assets amount to 600% of GDP, leaving it very vulnerable to any financial crisis.
Last week Moody’s cut Cyprus’s credit rating from A2 to Baa1, while Standard & Poor’s cut it by one level to BBB+. Bank of Cyprus, the country’s largest lender, issued what Joseph Cotterill of FT Alphaville called “an amazing impassioned statement”: “With our inaction, we are risking the ability of the state to refinance and the consequences will be immediate and severe. There is an imminent threat of Cyprus joining the European Union Support mechanism, with everything bad that entails” for Cyprus’s status as an offshore financial centre.
The government has dismissed the threat, saying that its financing needs are met until the end of the year. But investors are concerned. “We believe that Cyprus will be downgraded to junk over the next few months and will follow Greece into default over the next 12 months,” says Stuart Thomson of Ignis Asset Management.