The island of Cyprus is known for its close links to Greece, from the historic and cultural to the linguistic and economic. In the current environment, those links are looking a little less favourable. Despite going through a relatively shallow recession, the ratings agencies have downgraded Cyprus and its banks on several occasions over the past two years and their debt is now rated as speculative (although Fitch’s sovereign rating is still BBB-). The ties to Greece are largely responsible for these decisions.
Commercial banks in Cyprus have been heavily hit by their exposure to Greek government bonds (GGBs) and commercial loans. In its preliminary results for 2011, Cyprus’s largest bank, the Bank of Cyprus, made provisions during the year of €1.32bn on its holdings of GGBs and €217m on its Greek commercial loan portfolio. The figures for the country's second largest bank, Cyprus Popular Bank (until recently Marfin Popular Bank), were €1.97bn and €929m, respectively.