At the same time Moody’s affirmed the island’s Caa3 rating “to reflect the still-elevated risk of Cyprus defaulting on its debt, or undergoing debt restructuring over the medium term given the highly interrelated economic, banking sector and public finance risks it continues to face.” Moody’s said its decision to change the outlook to positive was Cyprus’ better-than-expected economic and fiscal performances in 2013.

The Cypriot economy contracted by 5.4% in constant prices in 2013, “exceeding estimates from both Moody’s and the European Commission.” This, together with the implementation of fiscal-consolidation measures, is expected to have reduced the general government deficit to 5.4% of GDP in 2013 from 6.4% in 2012, according to Moody’s estimates. “The second driver of the outlook change is the authorities’ proven commitment to meeting conditions under the Troika funding programme,” the agency said. Moody’s said the government continued to meet the conditions of the programme, including the strengthening of the financial sector’s supervisory and regulatory framework, itself an important programme milestone.

Last year, Cyprus agreed to a €10 billion bailout whose terms included closing its second biggest lender, Laiki, and seizing part of the deposits exceeding €100,000 to recapitalize Bank of Cyprus. Moody’s said it would consider upgrading Cyprus’ rating if there were further progress under the programme to ensure the medium-term stabilisation of the public debt ratio. Conversely, downward pressure on the rating would arise if the government defaults and imposes severe losses on its creditors.

Source: Cyprus Mail