The Rating Watch Negative (RWN) on both ratings has been removed. The Short-term foreign currency IDR and the Country Ceiling have been affirmed at `B`. According to Fitch, the downgrades of the Long-term foreign and local currency IDRs reflect the resolution of the RWN assigned to the ratings on 26 March 2013. At that time Fitch stated that it would resolve the RWN once details of the EU/IMF programme had been agreed and also made public, taking into consideration the official parameters and the credibility of the assumptions, including those on the economic and fiscal outlook and terms of financing and fiscal sources and uses. The downgrade of the foreign currency IDR to `B-` reflects the elevated uncertainty around the outlook for the Cypriot economy due to the high implementation risks on the agreed programme and the restructuring of the banking industry.

Fitch acknowledges that the programme improves the immediate position of the sovereign from both a liquidity and solvency perspective, however, it notes that Cyprus has no flexibility to deal with domestic or external shocks and there is a high risk of the programme going off track, with financing buffers potentially insufficient to absorb material fiscal and economic slippage. A premature lifting of capital controls that triggers material capital flight could have large negative economic consequences, says Fitch.

It further notes that public debt is likely to peak higher than the 126% of GDP by 2015 assumed under the programme, reflecting Fitch`s assumption of a deeper recession in the later years of the programme and a slower recovery than that assumed, with little visibility at this stage of the potential for Cyprus to transform its economy successfully away from sectors associated with the shrinking financial sector. According to Fitch, while the government has approved and agreed consolidation measures of just over 7% of GDP for the period 2013 to 2018, a further 4.7% of additional yet unidentified measures will be needed under the programme assumptions to hit the 4% of GDP target for the primary fiscal balance by 2018 which is required to reduce the debt load to the Troika`s target of close to around 100% of GDP by 2020.

Fitch`s two notch downgrade of the local currency IDR to `CCC` and the consequent one notch differential with the foreign currency IDR at `B-` reflects the agency`s assessment of the greater vulnerability of bonds issued under domestic law relative to foreign law bonds, it says.

Source Financial Mirrorhttp://www.financialmirror.com/