Moody's Investors Service has downgraded the foreign currency deposit and foreign currency bond ratings of Cypriot banks, concluding a review for a possible downgrade on Bank of Cyprus and Hellenic Bank.
Moody's further noted that while it is downgrading the deposit and bond ratings of Cyprus Popular Bank, it is leaving these ratings on review for possible further downgrade while it continues to review the Financial Strength Rating (FSR) of Cyprus Popular Bank for a possible downgrade.
Moody's explained that the downgrade is a consequence of likely EU accession in May 2004, in view of the stricter EU regulations regarding state support; Cypriot authorities may not be able to provide non-market-based support to the banks in future.
In addition, Moody's noted that under EU rules, although the monetary authority may provide liquidity assistance to a solvent bank, it is precluded from assisting an insolvent institution, while all liquidity assistance costs must be borne by the national central bank.
Moody's also noted that the EU branch operations of the Cypriot banks create large and increasing foreign currency obligations, relative to the foreign currency resources of the monetary authority.
Prior to this rating action, Moody's stated that it had added a considerable degree of support to the intrinsic Financial Strength Rating of each institution in deriving the deposit and debt ratings due to the government's previous ability to impose a considerable level of economic regulation, including capital controls; however, this is expected to diminish with EU entry.
In downgrading the foreign currency deposit and bond ratings, Moody's noted that it is imputing one notch of possible support on top of the intrinsic financial strength of each institution, since the authorities retain some flexibility to support the financial institutions in the event of need.
Pertaining to the review for a possible downgrade of the FSR of Cyprus Popular Bank (CPB), Moody's is continuing the review for possible downgrade and, as such, is leaving the deposit and bond ratings on review for a possible further downgrade.
The following rating actions were taken: the long-term foreign currency deposit rating of the Bank of Cyprus is downgraded to A3 from A2 and the foreign currency subordinated bond rating is downgraded to Baa1 from A3.
The long-term foreign currency deposit rating of the Cyprus Popular Bank is downgraded to Baa1 from A2 and foreign currency subordinated bond rating is downgraded to Baa2 from A3. The deposit, bond and C- financial strength rating remain on review for a possible downgrade.
Regarding the Hellenic Bank, the long-term foreign currency deposit rating is downgraded to Baa2 from A2. — (menareport.com)
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