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Cyprus will receive a series of important financial report cards in September, when three international rating agencies take a fresh look at the country’s economy.
Morningstar DBRS will publish its decision on Sept. 4, followed by S&P Global Ratings and Capital Intelligence Ratings on Sept. 18.
So what does any of this mean for the person paying a mortgage, filling up the car or trying to keep a small business running?
Credit ratings can sound like financial alphabet soup, but the basic idea is simple: They tell investors how safe it is to lend money to a country.
It is much like a bank checking someone’s income, debts and repayment history before approving a loan. The stronger the rating, the more trustworthy the borrower is considered, and, in theory, the less interest it may have to pay.
Cyprus is currently rated investment grade by all the main agencies, meaning its government bonds are viewed as relatively safe investments. That is a far cry from the financial crisis years, when the country’s rating was cut to “junk” status and borrowing became much more difficult and expensive.
DBRS currently rates Cyprus at A with a stable outlook. In March, the agency pointed to the economy’s continued growth, the government’s healthy finances, the stronger position of the banking sector and domestic political stability.
S&P affirmed Cyprus at A- in March, maintaining a positive outlook. That “positive” label matters because it means an upgrade could follow if the economy continues moving in the right direction, although it is not a promise.
Capital Intelligence currently places Cyprus at BBB+ with a stable outlook.
So what does any of this mean for the person paying a mortgage, filling up the car or trying to keep a small business running?
A stronger rating will not suddenly reduce supermarket prices or cut next month’s loan instalment. Mortgage rates are influenced far more directly by European Central Bank decisions and the policies of commercial banks.
However, if Cyprus can borrow at lower interest rates, the government spends less taxpayers’ money servicing its debt. Over time, that can leave more room for hospitals, schools, roads, benefits and other public services, or at least reduce the pressure for higher taxes.
The country’s rating can also influence how foreign investors view Cyprus and may help local banks and major companies access financing on better terms.
The September decisions will not be the final verdict of the year. Fitch, which rates Cyprus at A- with a positive outlook, will publish its next review on Nov. 6. Moody’s will follow on Nov. 20 and currently rates the country at A3 with a stable outlook.
For the government, maintaining, or improving, these ratings would be another vote of confidence in the economy. For ordinary Cypriots, the effect is less immediate but still real: The more Cyprus pays to borrow, the more of the public’s money disappears into interest payments.
It may be a report card filled with letters, but there is real money behind every grade.
