Research Update:

Ratings On Cyprus Raised To 'CCC+/C' From 'Selective Default' After Completion Of Distressed Exchange; Outlook Stable
Primary Credit Analyst: Benjamin J Young, London (44) 20-7176-3574; benjamin.young@standardandpoors.com Secondary Contact: Frank Gill, London (44) 20-7176-7129; frank.gill@standardandpoors.com Analytical Group Contact: SovereignEurope; SovereignEurope@standardandpoors.com

Table Of Contents
Overview Rating Action Rationale Outlook Key Statistics Related Criteria And Research Ratings List

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Research Update:

Ratings On Cyprus Raised To 'CCC+/C' From 'Selective Default' After Completion Of Distressed Exchange; Outlook Stable
Overview
Cyprus has completed the exchange of a number of outstanding local law governed bonds for new issues with longer maturities. Following completion of the exchange, we have raised our long- and short-term sovereign credit ratings on Cyprus to 'CCC+/C' from 'SD' (selective default). The outlook on the long-term rating is stable.

Rating Action
On July 3, 2013, Standard & Poor's Ratings Services raised its long-term foreign and local currency sovereign credit ratings on the Republic of Cyprus to 'CCC+' from 'SD' (selective default). The outlook is stable. At the same time, we raised our short-term foreign and local currency sovereign credit ratings on Cyprus to 'C' from 'SD'. We have also raised our ratings on the government's existing debt to 'CCC+'.

Rationale
On July 1, 2013, the Republic of Cyprus exchanged of a number of local law bonds totaling 1 billion into five separate issues with similar coupons and longer maturities (between six and 10 years). The exchange included the tender of $667 million of $715 million bonds due July 4, 2013. Following the completion of what we had viewed as a distressed exchange (see "Cyprus Ratings Lowered To 'SD' Following Announced Exchange Offer On Several Local Law Bonds," published June 28, 2013), we have raised the long-term sovereign credit and issue ratings on Cyprus to 'CCC+'. Under our criteria, we view a default under a distressed exchange as cured upon the completion of an exchange offer. At that point, we then set the sovereign rating at our forward-looking assessment of the probability that the sovereign will pay its debt in full and on time. This rating, one notch higher than the rating prior to default, also reflects two other factors that we believe have eased the government's immediate liquidity constraints. First, that the European Union, European Central Bank,

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Research Update: Ratings On Cyprus Raised To 'CCC+/C' From 'Selective Default' After Completion Of Distressed Exchange; Outlook Stable

and the International Monetary Fund ("the Troika") have disbursed a second 1 billion tranche under their Memorandum of Understanding (MoU) with the government. Second, the government has extended a 1.8 billion bond (9% of GDP), which came due on June 28, for one year to July 1, 2014, in accordance with the bond's original terms. The government had originally issued this bond in lieu of cash to boost Cyprus Popular Bank's capital (subsequently transferred to the Bank of Cyprus as part of Cyprus Popular Bank's resolution). Fiscal reserves of approximately $1.7 billion also suggest that immediate liquidity pressures have lessened. We note, however, that the government will still need to rollover its stock of 950 million Treasury bills (5% of GDP). About 700 million of local law governed bonds was untendered under this exchange but will be met under the original terms of the MoU, the government having satisfied the condition of financing 1 billion of the total 1.7 billion outstanding. That said, we believe Cyprus' economic prospects will remain difficult. In our opinion, economic growth will depend on it reorienting its economic base, likely including the development of offshore gas fields. Expected downsizing in the public and financial services sectors, as well as the banking system, will likely lead to significant job losses in these areas as well as in real estate and tourism; these sectors account for over 50% of Cyprus' GDP. We project that Cyprus' economy will contract by about 20% between 2013 and 2016. Weak growth and employment prospects may also weigh on public and political support for an ambitious budgetary consolidation program, while creating challenges for debt sustainability, in our view.

Outlook
The stable outlook balances what we view as the very significant economic adjustment challenges Cyprus faces against the time and resources provided by the Troika. We could lower the ratings if the government appeared unable to fulfill the program's conditions. We could raise the ratings if the economy were to stabilize sooner and at higher levels than we currently project, enabling general government debt to GDP to stabilize earlier and at a lower level.

Key Statistics
Table

Cyprus (Republic of) -- Selected Indicators

Fiscal year end Dec. 31 (Mil. ) Nominal GDP (bil. US $) GDP per capita (US $) Real GDP (% change) 2007 21.8 27,950 5.1 2008 25.1 31,842 3.6 2009 23.4 29,381 (1.9) 2010 23.1 28,143 1.3 2011 25.0 29,761 0.5 2012e 23.0 26,659 (2.4) 2013bc 20.4 23,233 (14.0) 2014bc 19.2 21,949 (6.0) 2015bc 19.2 21,947 (1.0)

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Research Update: Ratings On Cyprus Raised To 'CCC+/C' From 'Selective Default' After Completion Of Distressed Exchange; Outlook Stable

Table

Cyprus (Republic of) -- Selected Indicators (cont.)

Real GDP per capita (% change) General government balance (% of GDP) Change in general government debt (% of GDP) General government debt (% of GDP) Net general government debt (% of GDP) General government interest expenditure (% of revenues) Bank claims on resident non-govt. sectors (% of GDP) Consumer price index (average; % change) Gross external financing needs (% of CARs and usable reserves) Current account balance (% of GDP) Current account balance (% of CARs) Narrow net external debt (% of CARs) Gross external debt (% of GDP) 3.4 3.5 (0.2) 58.5 52.1 6.8 200.5 2.2 200.1 (11.7) (17.8) 8.2 300.6 2.2 0.9 (5.4) 48.9 46.2 6.6 253.9 4.4 347.4 (15.6) (24.4) 35.7 437.0 (2.8) (6.1) 13.5 63.3 60.1 6.4 271.1 0.2 695.3 (10.8) (17.9) 72.4 545.9 (1.5) (5.3) 12.1 73.4 71.2 5.5 284.4 2.6 869.7 (9.8) (16.8) 108.6 489.8 (1.9) (6.3) 15.2 86.2 80.2 6.0 294.7 3.5 694.2 (4.7) (8.3) 142.2 460.5 (4.9) (6.3) (2.1) 84.6 82.0 7.9 302.1 3.1 764.2 (11.7) (22.0) 155.3 442.7 (15.7) (18.0) 17.5 114.5 111.9 8.7 329.1 1.0 805.9 (7.5) (14.4) 82.2 364.5 (5.5) (12.0) 11.9 133.7 130.9 11.4 343.1 1.2 589.4 (5.8) (11.2) 122.2 342.4 (1.0) (6.0) 5.9 139.7 136.9 12.4 343.2 1.5 503.8 (5.2) (10.1) 93.3 317.2

e--Estimate. bc--Base case, reflects Standard & Poor's expectations of the most likely scenario. CARs--Current account receipts.

Related Criteria And Research

Cyprus Ratings Lowered To 'SD' Following Announced Exchange Offer On Several Local Law Bonds, June 28, 2013 Sovereign Government Rating Methodology And Assumptions, June 24, 2013 Sovereign Defaults And Rating Transition Data, 2012 Update, March 29, 2013 Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012 Distressed Sovereign Debt Exchanges: Examples From The Past And Lessons For The Future, June 28, 2011 When Would A "Reprofiling" Of Sovereign Debt Constitute A Default?, June 3, 2011 Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009 Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.

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Research Update: Ratings On Cyprus Raised To 'CCC+/C' From 'Selective Default' After Completion Of Distressed Exchange; Outlook Stable

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook.

Ratings List
Upgraded; CreditWatch/Outlook Action To Cyprus (Republic of) Sovereign Credit Rating Transfer & Convertibility Assessment Senior Unsecured Senior Unsecured Ratings Affirmed Cyprus (Republic of) Short-Term Debt Commercial Paper CCC+/Stable/C AAA CCC+ CCC+ From SD/--/SD D CCC

C C

Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.

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