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Euromoney Country Risk

ECR Results: Cyprus tops CEE rankings – but for how much longer?

The Republic of Cyprus retained its position at the top of the Euromoney Country Risk Central & Eastern European Rankings in March. However, with negative sentiment about Cyprus’s exposure to the Greek financial crisis increasing, questions remain over how long the country will retain its position at number one.

Since the beginning of 2011, Cyprus’ long term sovereign rating has been downgraded twice by Moody’s as concerns have grown over the country’s exposure to Greece’s sovereign debt crisis. The Bank of Cyprus and Marfin Laiki Bank, two of the largest Cypriot banks, both have extensive branch networks on Mainland Greece. Together, they have a combined exposure to the Greek economy equivalent to 2.5 times Cyprus’ GDP.

Cyprus’ banking sector is also directly exposed to the Greek sovereign. The Bank of Cyprus owns a total of €2 billion of Greek sovereign debt, against €2.7 billion of Tier 1 capital. Marfin Laiki Bank also has €3 billion of Greek debt set against capital of €6 billion.

Further, it has emerged that the Bank of Cyprus continued to buy Greek sovereign debt after Greece’s debt crisis began April 2010. From 2009 onwards, the Bank of Cyprus increased its holdings of Greek government debt from €0.1 billion to the present level of €2 billion.

On 7 April this year the chief executive of the Bank of Cyprus, Andreas Eliades, gave an interview in which he defended the Cypriot banking system, stating that the bank of Cyprus would be able to withstand any haircut imposed on bondholders because the bonds had been bought at a discount.

Moody’s has said that up to €2.7 billion would be required to recapitalise the Cypriot banking sector in the event of severe financial stress. This contrasts with the €0.5 billion Financial Stability Fund recently announced by Cyprus’ Central Bank Governor Athanasios Orphanides.

Cyprus’ generous deposit guarantee scheme has attracted an enormous foreign deposit base that has swelled the banking sector to 6.5 times GDP. In 2009, the Central Bank increased the compensation limit for deposit holders to €100,000 from €20,000. The scheme was also expanded so that deposits in all foreign currencies are now covered by the scheme. Panicos Demetriades, Professor of Economics at the University of Leicester, says: “The banking system, through over-expansion underwritten by a generous deposit insurance scheme, has become the Achilles heel of an otherwise successful island economy.”

Negative outlook

Sentiment has stayed negative on Cypriot assets: yields on six-month Cypriot sovereign debt rose from 2.02 per cent to 2.74 per cent between January and March. The Cyprus Stock Exchange has been flat in 2011 and has shown no sign of recovery from the crash that followed the global financial crisis.

Cyprus’ status as an international financial centre, along with its close historical ties to Western Europe and its membership of the euro, have long been seen as strengths by ECR economists. The country has frequently been the top performer in the region in the survey’s political and structural risk categories, successfully retaining this position in March 2011.

However, the publication of the latest round of the Bank for International Settlements’ Consolidated Banking Sector Statistics (which measure the cross-border exposure of national banking systems) on April 28th, may well prove the catalyst for a re-rating by ECR economists.

To read the full results of the Euromoney Country Risk CEE Results, go to and register to join the site.

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