Cyprus FinMin says banks won't need gov't help

January 28, 2012 - 9:45 AM

NICOSIA, Cyprus (AP) — Cyprus' banks will be able to recapitalize on their own and won't need state support thanks to fiscal measures buttressing the island's financial system, the government said on Saturday.

Cyprus' Finance Ministry said in a statement that the economy has "strong foundations" and added that it will soon unveil a growth-oriented package of measures that it's preparing in partnership with the private sector.

The ministry made its remarks a day after international ratings agency Fitch downgraded the eurozone member by a notch to BBB-, a step above junk status.

Fitch said the downgrade was mainly due to the large Cypriot banking system's heavy exposure to Greek debt and its greater capital needs in light of the higher likelihood that banks will take a hit on Greek government bonds that exceeds 50 percent.

Fitch said Cypriot banks would need to almost double the euro900 million ($1.18 billion) — or 9.9 percent of gross domestic product — to build an adequate buffer against losses on their Greek exposure if the "haircut" on Greek government bonds reaches 70 percent.

Standard & Poor's became the first ratings agency to push Cyprus into junk territory with a two-notch downgrade earlier this month. Moody's also rates the island just above junk.

Cyprus government spokesman Stefanos Stefanou on Saturday called the downgrades unfair.

"We consider that the downgrades don't reflect the real state of the Cyprus economy, which is in better shape than many other economies, either in the eurozone or in the European Union in general," he told reporters.

According to the European Commission, the island's deficit is projected to shrink from 6.7 percent of gross domestic product in 2011 to 2.7 percent this year following a string of fiscal consolidation measures including a 2 percent sales tax hike and a two-year public sector wage freeze.

The island's debt is projected to reach 68.4 percent of GDP this year, well below the eurozone average of nearly 87 percent.

But high borrowing costs have effectively locked Cyprus out of the international markets. The island is relying on a euro2.5 billion ($3.29 billion) low-interest loan to meet its financing needs for this year.