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Cyprus Gets A Debt Makeover


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What's going on?

Cyprus’ government plans to use its recent debt rating upgrade to sell new bonds to investors – at a much lower cost than before.

What does this mean?

Cyprus got its new rating on Friday thanks to Standard & Poor’s (S&P), which rates the ability of countries and companies to pay back their debts. The Mediterranean island spent six years with a rating of “junk” on its bonds, but it’s now back to “investment grade[tweet this] (says S&P – other rating agencies haven’t changed their tunes). The upgraded rating means S&P thinks Cyprus’ debt is safe enough for most investors to consider – including the European Central Bank (ECB). Now, Cyprus can take part in the ECB’s stimulus program, which is good for its economy.

When Greece went belly up in the aftermath of the global financial crisis, Cypriot banks faced big losses on their loans to Greece – potentially crippling the country’s economy. The rising risk of Cyprus not being able to pay its debts led rating agencies to downgrade it in 2012 and the ECB to bail it out in 2013.

Why should I care?

The bigger picture: Not all bailouts are the same.

While Cyprus’ bailout has been pretty successful, Greece’s didn’t go so well. The $71 billion bailout ended last month and didn’t leave the country with the rosiest outlook. Greece has had to cut pensions and increase taxes, while Cyprus is smiling at its brighter growth prospects.

For markets: Cyprus is hot (and not just the weather).

Between the ECB and investors buying Cyprus’ bonds, their prices rose – which meant their yields fell (remember: a bond’s yield is a fixed amount of interest expressed as a percentage of its price, so it drops when the price goes up). In 2015, investors in Cypriot debt were receiving a yield of 11.62% but, nowadays, 2.4% looks likely to be the speed of things, according to the Financial Times.

Originally posted as part of the Finimize daily email.

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