Cyprus hits the rocks – could Malta be next? ECR Q1 2013


Jeremy Weltman
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While a handful of euro-using nations became safer during Q1 2013, many either stabilized on low scores or saw their risks accentuate, including Cyprus.

A straw poll of Euromoney’s country risk website users in January indicated that although concerns about the US public finances and MENA geopolitics are important issues, it is the eurozone crisis that presents the gravest threat to the global economy in 2013.

The 17-nation single-currency area has shed just 0.4 of a point since December, but is down 1.9 points since March 2012 and 11.1 in total over the past three years, the most of any geographical/economic bloc barring Australasia, which is affected by outliers.

The political stasis in Rome, financial crisis in Cyprus, and structural policy problems in Spain, Portugal and other countries have all served as a stark reminder of the bumpy roads on the path to finding a cure-all for the sickly eurozone patient.

As Euromoney’s country risk survey had been warning, rising risks across the indebted periphery for smaller countries such as Cyprus underscore the contagion risks from the Greek tragedy and of other peripheral danger zones, as well as the peculiar build-up of private debts in offshore financial centres.

In the event, the botched handling of the Cyprus debacle contributed as much to the region’s increased risk perceptions as the underlying banking problems that needed resolving.

Cyprus’s increased risks, seen in an abrupt reversal in credit default swap (CDS) spreads, was matched by an equivalent fall in its score. The sovereign lost 5.9 points in Q1 2013, taking its total down to 52.5.

It culminated in a 19-place drop in the rankings to 61st place, the most of any of the countries in Euromoney’s survey since December. Crucially, participating analysts reported rising economic risk in Cyprus before the announcement of a proposed raid on insured depositors on March 16.


A closer look at the uneven transfer risks across the eurozone region has cast the spotlight over other small, offshore locations, including Malta, which joined the euro at the beginning of 2008, along with its Mediterranean counterpart, on a similarly uncompetitive basis, and which has also seen its risk perceptions deteriorate.

Malta’s score, down 2.5 points to 66.5, has seen it slip four places in the rankings since December, to 30th, and seven steps in total compared with March 2012 – something that its CDS spreads do not appear to have factored in to date.

However, the market has priced in increased Slovenian risk, which had been already factored in by ECR experts, as evinced in its long-term trend score decline – down 16.6 points in three years, the most of any country in Central and Eastern Europe (CEE).

But larger countries are not out of the woods just yet. Several of the debt-ridden eurozone sovereigns might have seen their scores improve since the end of last year, reflecting some progress in their fiscal adjustment programmes perhaps.

Yet, having fallen sharply to record lows in recent years, their risks could hardly have got any worse – the rises in Q1 2013 reflect little more than stabilization after an extended period of decline.

Only two countries, Austria and the Slovak Republic, appear to have enjoyed genuine gains, rising by 1.4 and 1.3 points respectively, helping them to maintain their 14th and 25th place rankings.

Though dissimilar in many respects, both countries have managed to avoid the excesses seen in other sovereigns, with Slovakia expected to see solid real GDP growth of 2% to 3% in 2013-14, and with less debt to worry about – its general government burden is forecast to remain below 60% of GDP by the end of next year on current OECD projections.

One of ECR’s Slovakian experts, Miroslav Frayer, an economist at Komercni Banka, tells Euromoney: “Regarding the political assessment, Slovakia remains safe. There is strong support from the government, which is looking to implement new fiscal consolidation measures, targeting a government deficit of below 3% of GDP.

“Because of its strong support it is quite possible that this deficit reduction target will be achieved. The big risk is for economic development if GDP is lower than expected, as there will then be challenges to meeting the fiscal targets.”

Austria, too, although more of a concern lately from an economic and fiscal viewpoint with exports sliding, has also seen its risks subside.

However, faith in Italy – still without a working government – and in Spain has deteriorated further as both countries struggle with the intricacies of their political, economic and structural deficiencies.

In total, 12 of Italy’s 15 risk indicators were downgraded in Q1 2013, along with 10 of Spain’s – with a marginal rise in the Spanish bank stability score providing the only modicum of improvement, and a small sign that the government’s efforts to restructure the banks’ bad debts are a move in the right direction.

With its illness still mutating, the eurozone patient is far from recovery, which is only likely to prompt investors to look further afield for better risk-return options.