by Richard Barley
Wall Street Journal
June 1, 2011
Even as fears of an imminent Greek debt restructuring fade, the risk of contagion remains alive.
The latest evidence comes from Cyprus, which saw Fitch lop three notches off its credit rating Tuesday. The links between banks and sovereigns mean risks still are rebounding between private- and public-sector balance sheets.
Cyprus's problem is the flip side of Greece's. Its government debt is moderate at 61% of gross domestic product. But Cypriot-owned banks have assets of over six times GDP, and S&P estimates total exposure to Greece at 1.7 times GDP. Were Greece to reduce the value of its debt by 50%, Cyprus would need to inject €2 billion ($2.8 billion) of fresh capital, or 11% of GDP, into its biggest banks to bring their Tier 1 ratios back to 10%, according to Fitch estimates. That could rise to 25% of GDP if a Greek default triggered wider economic fallout.
But even without a Greek debt restructuring, Cyprus's banks were tightening lending standards in the first quarter, citing concerns about access to market financing and liquidity, according to the Central Bank of Cyprus. That poses a threat to growth.
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