Though it may seem a little like stating the obvious to many, Moody’s comments:
While the risk of a euro exit by Cyprus is substantial… …following the economic dislocation that will be caused by the restructuring of the island’s two largest banks and the imposition of capital controls in the country, it is possible that the risk of euro exit will increase further.
And so while the talking heads discuss Cyprus as a unique situation and too small to care about, it seems the reality of the last two weeks has actually raised their chance of Euro exit as opposed to bailed them into the Euro.
Moody’s lowers Cyprus’s country ceilings to Caa2
London, 27 March 2013 — Moody’s Investors Service announced today that it has lowered its assessment of the highest rating that can be assigned to a domestic debt issuer in Cyprus to Caa2, based on the increasing risk of an exit by the country from the euro area. Any rating actions taken as a result of the new country ceiling will be released during the coming week.
Cyprus’s Caa3 government bond rating, and negative outlook, remains unchanged as it does not lie in the scope of this announcement.
While the risk of a euro exit by Cyprus is substantial, Moody’s does not consider it as its central scenario. Following the economic dislocation that will be caused by the restructuring of the island’s two largest banks and the imposition of capital controls in the country, it is possible that the risk of euro exit will increase further. If that were to occur, the maximum rating Moody’s would assign to Cypriot securities would fall further.
An exit would result in large losses to investors due to the redenomination of government debt and private debt securities issued under Cypriot law. It would also lead to further severe disruption to the country’s banking system and additional acute dislocations in the real economy. Such disruption would generally imply additional losses for holders of debt securities issued by Cypriot entities, irrespective of their governing law.
Moody’s country ceilings capture externalities and event risks that arise unavoidably as a consequence of locating a business in a particular country and that ultimately constrain domestic issuers’ ability to service their debt obligations. Country ceilings encapsulate elements of economic, financial, political and legal risks in a country, which include political instability, the risk of government intervention, the risk of systemic economic disruption, severe financial instability risks, currency redenomination and natural disasters, among other factors. These factors need to be incorporated into the ratings of the strongest issuers. The ceiling caps the credit rating of all issuers and transactions with material exposure to those risks. In other words, the ceiling affects all domestic issuers and transactions other than those whose assets and revenues are predominantly sourced from or located outside of the country, or which benefit from an external credit support.