Eurozone crisis bigger global threat than MENA conflict, US debt, China hard landing

Analysts participating in Euromoney’s Country Risk Survey reported rising economic risk in Cyprus before the announcement of a proposed raid on insured depositors on March 16.

Cyprus’s ECR score, which tracks economists’ perceptions of risk across 18 indicators of political and economic stability, declined by 1.0 points on March 14, two days before the start of fraught bailout negotiations between Cypriot lawmakers and EU officials.

The score then fell a further 1.4 points on March 20, at the midway point of negotiations. Cyprus’s ECR score is now 55.6, having fallen by 2.7 points over the course of the recent crisis. This decline reflects analysts’ heightened concern about the status of the island’s economy and banking sector solvency.

The country’s score decline was underpinned by increased economic risk, with its economic assessment score having fallen by 6.5 points to 51.5 in Q1-2013.

Meanwhile, Cyprus’s banking stability indicator proved to be the country’s most pressing rating constraint in the lead up to events. Between March 12 and March 14, analysts assigned an average bank stability score of only 3.0 points (out of 10), leaving that indicator to fall by 1.2 points to 4.6 in Q1 2013.


Cyprus’s overall ECR score had already plunged by 8.2 ECR points in 2012, making it the second worst performer in the ECR survey last year.

The sovereign slipped 11 places in the ECR global rankings last year and four places in the fourth quarter. With a global rank of 53, Cyprus now sits in the lower bound of ECR’s tier-three category, alongside fellow eurozone strugglers Italy and Spain.

Only Slovenia witnessed a higher deterioration in its risk profile, after the country’s ECR score plummeted 11.1 points to 60.5 last year. This leaves the sovereign ranked 11th in the eurozone for sovereign risk and 37th globally.

Not surprisingly, the country’s banking sector strength remains the country’s most pressing rating constraint, after analysts participating in the ECR survey downgraded the country’s bank stability indicator by 1.2 points to 4.6 in Q1 2013, leaving Cyprus with the fourth riskiest banking sector in the eurozone.


Euromoney magazine recently explained the systematic risks posed by the Cypriot banking sector to the country’s credit profile: “With assets of €120 billion, Cyprus’s bloated banking sector is equivalent to seven times the size of its €18 billion GDP. This is on a level with Ireland pre-crash (seven times) and the UK (six times). Banking assets in the island grew by 50% between 2007 and 2012, partly due to capital flight from Greece.”

Cyprus’s other economic indicators include: economic outlook 4.9 (-0.6), transfer risk 7.1 (-0.5), monetary policy 6.6 (-0.5), employment 5.2 (-0.4) and government finances 4.3 (-0.3).

The country’s deterioration in the rankings reflects the stark impact of the eurozone financial crisis on sovereign risk. The eurozone’s problems had a more negative impact on sovereign risk assessment than regime transition concerns in the Middle East, according to ECR analysts. As ECR data reveals, Slovenia, Cyprus, Spain and Italy’s ECR score deteriorated more than Egypt, Lebanon and Libya in 2012 (see the chart below).


Indeed, the eurozone’s threats to the global economy were highlighted by ECR analysts in a recent Euromoney Country Risk opinion poll. More than 50% of respondents regarded the eurozone crisis as representing the greatest threat to the world economy in 2013 (poll date: January 28, 2013), more so than MENA geopolitics, US public finances and a China hard-landing.

Furthermore, ECR analysts largely consider the eurozone crisis as a predominately economic concern rather than a political one.
Indeed, Cyprus’s score decline was underpinned by higher economic risk sentiment, with all five of the country’s economic indicators downgraded by ECR experts in Q1-2013.

The systemic risks stemming from Cyprus’s bank crisis means that the country’s banking stability indicator sector is now riskier than Slovenia’s. This score convergence highlights the contagion fears at the forefront of analysts’ risk perceptions.

Slovenia’s banking stability indicator fell by 0.2 ECR points in 2012, leaving it with a bank stability score of just 4.8 points (out of 10).


Slovenia’s banks are saddled with some €7 billion bad loans, feeding speculation the sovereign could be the next domino to fall. This was highlighted in August, when one of ECR’s expert contributor’s Ales Pustovrh outlined that the country would need a bailout in the event of a bank run.

“In case of a bank run happening in other periphery countries, Slovenian banks would likely face a bank run as well,” says Pustovrh. “The contagion would not be due to direct exposure – Slovenian investors owned a total of €410 million-worth of bonds in Piigs countries [56% of them were Italian bonds], less than 9% of their total holdings of bonds.”