By: Dr. Mike Campbell

Cyprus joined the Euro in 2008. The island has two main communities, the Greek-Cypriot and the Turkish-Cypriots and suffered a civil war that left the country fractured into two halves in 1974. In 2004, the country joined the EU under restricted terms and since 2008, leaders of the two communities have been negotiating for a full reunification of the island.

Cyprus was relatively well placed, in debt terms, when the global financial crisis struck since it had had to adopt austerity measures in order to meet the convergence criteria for joining the Euro. The current level of deficit stands at about 5.7% with public debt at 61.1%, so compared to other nations on the Eurozone periphery, it is still well-placed.

Moody’s have decided to reduce Cyprus’s credit rating from A2 to Baa1, citing concerns about the nation’s exposure to Greek debt and economic problems caused by damage to the nation’s power production following an accident. It is estimated that between €4.5 and 5 billion has been lent by Cypriot banks to Greece. If Greece were to default on her borrowing, some of this money would be lost. The Cypriot GDP is worth approximately €23 billion. Should Cyprus need to raise money through a bond issue, the credit rating downgrade will make this more expensive since Cyprus would need to pay investors more interest to compensate for the perceived higher risk of a default.

With the deadline looming to raise the borrowing ceiling, the world’s largest economy, the USA, is still rated at AAA by the ratings agencies. If the politicians cannot agree on the terms for increasing the borrowing limit, the USA will partially default on its debts on August 2nd.