Moody’s downgrades Cyprus as bank bailouts seen likely

 Reuters :  Moody’s Investors Service downgraded Cyprus’ credit ratings by two notches, forecasting the government will have to bail out its banks next year due to their exposure to Greek debt.

The new Baa3 rating given by Moody’s to the Mediterranean country is the lowest in the investment-grade category. It may soon be cut to junk as the agency placed it on review for possible further downgrades.

The need for state support to the Cypriot banking system comes at a moment when the Nicosia government has lost access to international capital markets, which will likely force the country to seek emergency funding from official sources, Moody’s said. “This state support will have a significantly negative impact on the government’s debt metrics,” the ratings agency said in a statement.

“The full extent of required state support for the Cypriot banking system could increase further, given the substantial downside economic and financial risks in Greece,” it added, explaining why further downgrades are possible in the near term.

Another reason for the downgrade, Moody’s said, is Cyprus’ weak capacity to implement budget and structural reforms needed to ensure the sustainability of government finances.

Among the big-three ratings agencies, Moody’s has now the lowest rating for Cyprus. Fitch Ratings in August downgraded the country to BBB, one notch above Moody’s Baa3.

Standard & Poor’s, which still has Cyprus at BBB-plus, in August placed that rating on credit-watch negative, a sign that it could cut be cut very soon.