Last Friday, Moody's delivered a double upgrade for Cyprus, propelling the nation into the investment-grade category recognized by all four major financial firms. Although these rankings may appear modest, their real-world impact is substantial.
This development is poised to trigger heightened investor interest in Cyprus' sovereign debt offerings, both existing and new. The country's government bonds now bear the imprimatur of approval from all four leading credit rating agencies.
Consequently, numerous investment funds that exclusively allocate resources to countries possessing this prestigious quartet of endorsements will now consider Cyprus as a prime addition to their portfolios.
Distinctly, there exist investment funds that exclusively deal with government bonds from top-tier nations, and others that have preferences for specific rating agencies' imprimatur. The critical shift lies in the fact that, until recently, Cyprus was deemed less attractive to investors due to its "junk" status as assessed by Moody's.
Turning our focus to practical implications, the augmented demand stemming from this newfound appeal has led to an increase in the prices of Cypriot bonds and a corresponding drop in yields.
This translates into cheaper borrowing costs for the nation, resulting in reduced interest payments and alleviating the burden on its budget. Essentially, Cyprus is now in a better position to manage its national debt, thanks to this surge in demand and improved pricing.
While this upgrade by Moody's is certainly a reason for celebration, it's important to acknowledge that Cyprus still resides in the lower echelons of the investment hierarchy. Not all sections of the investment community engage with nations in these tiers, often preferring higher-rated counterparts. Cyprus, despite its commendable economic performance, remains excluded from certain investment circles.
Now, the question arises: Who deserves the credit for this double upgrade? There's an ongoing debate, both within and outside of Cyprus, regarding whether the current or previous government should be attributed with this achievement. It's worth noting that the current administration has only been in power for seven months, hardly sufficient time to implement substantial economic reforms.
However, Moody's decision implicitly reflects a vote of confidence in the government's perceived commitment to a different economic model than its predecessor.
This sentiment is further clarified in the second paragraph accompanying Moody's assessment, which explicitly states, "the two-tier upgrade of the rating of Cyprus to Baa2 from Ba1 reflects broad-based, continuous improvements in its credit profile due to past and ongoing economic, fiscal, and banking reforms." In essence, the upgrade acknowledges not only current efforts but also reforms and policies initiated by previous administrations.
To add context, Moody's had refrained from upgrading Cyprus for over a decade. Since 2018, Cyprus has demonstrated a remarkable reduction in debt levels, non-performing loans, fiscal surpluses, lower unemployment rates, and resilience in the face of global challenges such as the pandemic and geopolitical tensions.
This double upgrade, occurring in the challenging economic landscape of 2023, can be viewed as a long-awaited recognition of Cyprus' sustained efforts since 2018, diverging from the assessments made by other rating agencies.