NICOSIA, July 28 (Xinhua) -- Moody's Investors Services has upgraded by one notch the government of Cyprus long term issuer rating to Ba2 from Ba3 given the recovery of the island's banking system, strong economic growth and its fiscal surplus.
The upgrade puts Cyprus just two notches below investment grade, a most welcome development, although the eastern Mediterranean island has gained unhindered access to financial markets following the near melt-down of its economy in 2013.
Moody's said the liquidation of Cyprus Cooperative Bank via the sale of its healthy assets and liabilities has materially reduced systemic risks emanating from the banking sector.
It also said its decision was influenced by the positive fundamental trend with respect to the government's balance sheet, based on robust nominal growth and a primary surplus.
However, Moody's changed Cyprus' positive outlook to stable because of pressures for higher public expenditure as the economy becomes healthier all the time, and also because of uncertainty around the extent to which new legal tools will enable a material decline in the banking system non-performing loan (NPL) ratio.
"Moody's would consider changing the outlook on the Ba2 ratings to positive and eventually upgrading Cyprus' Ba2 ratings if Moody's were to conclude that macroeconomic conditions and policy actions were to result in a sustained and significant decline in the government debt stock and in the stock of non-performing loans in the banking sector," the Moody's statement said.
It further warned against increasing public expenditure on account of strong pressures by unions for a return of benefits cut during the 3-year bailout probation of Cyprus and against failure to take advantage of legislation giving stronger tools to banks to reduce their non-performing loans.
Cyprus' parliament recently modified the insolvency and foreclosures legal framework to give a quicker pace to processes for the recovery of bad loans, causing strong reaction from an association representing loan owners.