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Moody's upgrades Cyprus on banking sector recovery, positive fiscal trend

Moody's raised Cyprus' long-term issuer rating to Ba2 from Ba3, citing the ongoing recovery of the country's banking sector and the positive trend in the government balance sheet.

The rating agency said Cyprus "has taken an important step forward" in the recovery of its banking system with the sale of certain assets and liabilities of government-owned Cyprus Cooperative Bank Ltd., or CCB, the country's second-largest, but weakest, bank.

Moody's said CCB's liquidation "has materially reduced systemic risks emanating from the banking sector." The Cypriot government has issued €3.190 billion in debt in order to carry out the bank's orderly liquidation.

One-off costs of the CCB transaction delayed the government's debt reduction efforts by three years, according to Moody's. However, the rating agency projects the general government debt/GDP ratio to start declining again from 2019 and to fall below 90% by the end of 2021, from a new peak of 107.0% in 2018.

"This debt reduction will be supported by strong economic growth and persistent primary surpluses," Moody's said.

The debt watcher said Cyprus' economic expansion will surpass the potential growth rate of about 2% in the next few years, thanks to a boost from a large number of investment projects and real estate construction.

As part of the rating action, Moody's also lowered Cyprus' outlook to stable from positive, balancing the country's strong fiscal dynamics against pressures for higher public expenditure.

"The stable outlook reflects the balanced risks that the sovereign faces in continuing to address the aftermath of the country's financial crisis," Moody's said.