Cyprus is not an important player on the world’s financial stage but it does bear noting that banking and sovereign debt problems run both wide and deep in the European Union. The latest news underscoring these difficulties comes via Fitch, which has just downgraded the largest banks in Cyprus to below investment-grade status.
The downgrade of the three banks, Bank of Cyprus, Marfin Popular Bank and Hellenic Bank, means that many investors can no longer lend money to these banks, making the probability of default greater. This downgrade from BBB- to BB+ puts the banks again one notch below the sovereign credit rating of Cyprus which was downgraded last week to just one notch above junk status.
We should consider this a knock-on effect of Greece’s national insolvency and default. Fitch announced in the statement on the Cypriot banks that it anticipates greater pressure on the financial sector in Cyprus because Greece is going to write down its sovereign debt by fifty to seventy percent. Cyprus has a large Greek population and so these banks have large holdings of Greek sovereign debt relative to the size of their capital base.
Sources: Associated Press, NRC Handelsblad