Credit default swaps (CDS) on Cyprus debt have jumped to 674 basis points, the sort of level that preceded the EU rescues of Greece, Ireland, and Portugal. The CDS were trading in the 300s earlier this month, according to Markit.
Yesterday’s 2-notch downgrade by Moody’s to Baa1 – due to “fractious politics” and exposure to Greece – has come as a nasty surprise to markets and the EU authorities. It should not have done.
Cyprus has been sailing close to the wind for several years. The current account deficit reached 17.5pc of GDP in 2008 (IMF data), and is still high. The budget deficit is running at over 7pc this year.
The country has lost competitiveness since pegging its currency and then joining EMU, much like Greece. But there is another twist. Its banking system is “roughly nine times GDP”, according to Chris Pryce at Fitch Ratings.
Yesterday’s 2-notch downgrade by Moody’s to Baa1 – due to “fractious politics” and exposure to Greece – has come as a nasty surprise to markets and the EU authorities. It should not have done.
Cyprus has been sailing close to the wind for several years. The current account deficit reached 17.5pc of GDP in 2008 (IMF data), and is still high. The budget deficit is running at over 7pc this year.
The country has lost competitiveness since pegging its currency and then joining EMU, much like Greece. But there is another twist. Its banking system is “roughly nine times GDP”, according to Chris Pryce at Fitch Ratings.
