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The Journal Gazette

Friday, June 28, 2013 5:32 pm

S&P knocks Cyprus down to 'selective default'


Standard & Poor's lowered its credit rating on Cyprus on Friday, knocking the debt-stricken island country into "selective default" because of a "distressed" debt exchange.

The Cypriot government is swapping some local bonds for longer-term bonds. Though that eases some of the immediate liquidity pressure on Cyprus, the S&P analysts said they thought the new bonds were on "less favorable terms" for investors than the existing bonds. They called it a distressed exchange, implying that Cyprus had to swap its debt because it had few other financing options.

The country's long-term rating was already in "junk" status, but Friday's move pushed it down three levels, from "CCC" to "SD," or selective default. A straight default would mean the country was not meeting any of its obligations.

In March, Cyprus negotiated a 23 billion euro ($30 billion) bailout with the International Monetary Fund, the European Central Bank and the European Union. But to get the money, Cyprus had to agree to cut spending and restructure its banking system.

Cyprus' economy is slowing, its unemployment is increasing and deposits at its banks have shrunk.

The S&P analysts said they could raise their rating on Cyprus back up into junk status if the exchange goes through as planned, and if another government bond is extended.