The credit ratings agency Fitch has downgraded debt issued by Euro Zone member Cyprus by two notches, from “BB+” to “BB—” and said the outlook was negative, which means it could be cut further.

“The downgrade of Cyprus’s sovereign ratings reflects the materially weaker macroeconomic outlook, a fiscal budget that has significantly underperformed expectations and the continued high level of uncertainty over the costs associated with bank recapitalisation,” a Fitch statement said.

The rating for Cyprus, which currently holds the European Union’s rotating presidency, was initially cut to speculative, or junk, status by Fitch five months ago.

A “delay in negotiating official support has contributed to the deteriorating economic conditions and raised uncertainties about public sector reform and the correction of macroeconomic imbalances,” Fitch warned.

“The government’s short-term financing flexibility has also been materially reduced with the its current dependence on bank financing to meet its funding needs,” the agency added.

On Friday, another rating firm, Moody’s, said it would review Cyprus for a possible downgrade just five weeks after its last cut.

Cyprus asked for a European Union (EU) bailout in June, but those negotiations only began in mid-November.

A troika of international lenders — the EU, the European Central Bank and the International Monetary Fund — are trying to determine with Cypriot authorities the extent of public-sector cuts required in return for financial aid.

A Cypriot presidential election scheduled for February 17 has raised the risk of delays in agreeing to terms of a rescue programme and disbursement of aid until late in the first quarter of 2013.

Cyprus has been unable to borrow from international markets since last year when credit rating agencies first cut its sovereign rating to junk status.

The country’s economy fell into its second recession in less than two years in mid 2011, and business activity contracted by 2.3 per cent in the third quarter of 2012 on a 12-month basis, the sixth consecutive quarter of shrinkage.

The finance ministry predicts that gross domestic product will contract by 2.2 per cent in 2012, which is mildly lower than the European Commission’s 2.3 per cent forecast.

(This article was published on November 22, 2012)
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