PARIS (MNI) – Moody’s Investors Services said Thursday it has
placed Cyprus’s Aa3 local and foreign currency government bond ratings
on review for possible downgrade, given concerns about the government’s
recent fiscal deterioration, competitive challenges and the country’s
bank exposure to Greece.

Following is the text of Moody’s statement on Cyprus:

London, 13 January 2011 — Moody’s Investors Service has today
placed Cyprus’s Aa3 local and foreign currency government bond ratings
on review for possible downgrade. Cyprus’s country ceilings for bonds
and bank deposits are unaffected by the review and remain at Aaa (in
line with the Eurozone’s rating).

Moody’s decision to initiate this review was prompted by (1)
concerns that the recent deterioration in the Cypriot government’s
fiscal metrics is largely structural; (2) competitiveness issues; and
(3) the banking sector’s exposures to macroeconomic stress in Greece.

Moody’s says that the rating could be adjusted downwards by more
than one notch, although the rating is likely to remain in the
investment-grade A category.

RATIONALE FOR REVIEW

“The severe impact of the financial crisis on Cyprus caused a
deterioration in government finances that may prove very difficult to
reverse,” says Sarah Carlson, Vice President-Senior Analyst at Moody’s
Investors Service and lead sovereign analyst for Cyprus. While it is
true that Cyprus’s debt level is currently much lower than that of many
other Eurozone countries, Moody’s notes that it has risen very quickly
and expect it to continue rising in the coming years.

“While the Cypriot government has put forward a 2011 budget that
appears to comply with its commitments under the EU’s Excessive Deficit
Procedure, its plans do not address the structural issues that may
undermine the government’s financial strength over the medium to long
term,” says Ms. Carlson.

FACTORS TO BE CONSIDERED IN THE REVIEW

Firstly, Moody’s rating review will focus on Cyprus’s ability to
reverse the recent deterioration in the government’s fiscal metrics and
maintain this reduction over the medium to long term. “Over the short
term, the government may be able to meet the deficit reduction targets
that it has agreed under the Excessive Deficit Procedure. However, given
the structural rigidities of the state budget, maintaining these
reductions over a number of years may be extremely challenging,” says
Ms. Carlson. During this review, Moody’s will be looking at the
government’s ability to address these rigidities — particularly as they
relate to the public sector payroll and social transfers.

Secondly, Moody’s will also assess the country’s ability to address
competitiveness challenges. At the moment, the Cypriot government
appears to have time to address these issues, but, in Moody’s view, the
challenges currently faced by several governments in the Eurozone
periphery are a vivid reminder of how quickly these problems can become
more immediate concerns.

Thirdly, the rating agency will focus on the Cypriot banking
sector’s exposures to Greece and the downward pressure they are exerting
on the sovereign’s rating. Although reported capital and liquidity
levels are not a source of major concern, the sector’s large size
relative to the size of the economy and its significant exposures to
stressed macroeconomic conditions in Greece will also be a consideration
in Moody’s review.

PREVIOUS RATING ACTION

The previous rating action on Cyprus was implemented on 3 January
2008, when Moody’s upgraded the foreign and local currency government
bond ratings of Cyprus to Aa3 with a stable outlook from A1 further to
the country’s entry to the Eurozone.

METHODOLOGY

The principal methodology used in rating the Government of Cyprus
is Moody’s “Sovereign Bond Ratings” Methodology published in September
2008, which can be found at www.moodys.com. Other methodologies and
factors that may have been considered in the process of rating this
issuer can also be found on Moody’s website.

–Paris Newsroom, +331-42-71-55-40; paris@marketnews.com

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