Moody’s drops Cyprus to ‘junk’ status

NICOSIA, Cyprus — International credit ratings agency Moody’s downgraded euro member Cyprus to “junk” status Tuesday on heightened concerns over its banking sector’s exposure to Greece.

The agency cut its rating on Cyprus by one notch, to Ba1, and assigned a negative outlook, meaning that further downgrades are possible.

Moody’s is the second agency to push the island nation’s credit rating to junk after Standard & Poor’s in January. Fitch rates Cyprus a notch above junk.

The downgrades have effectively shut Cyprus out of the international markets, prompting it to seek a $3.3 billion low-interest loan from Russia to meet its financing needs for this year.

Moody’s said that apart from their significant Greek government bond holdings, Cypriot banks’ woes are compounded by their large Greek loan portfolios. It said those stresses on the banking system combined with weak private-sector confidence and adverse external conditions will constrain the island’s growth potential in the next few years and add to the fiscal challenges facing the government.

“Although the government seems well positioned to achieve significant progress this year, unfavorable economic conditions present implementation risks in 2013 and beyond,” Moody’s said.

The agency said that although Cypriot banks are looking to bolster their capital buffers through private-sector investment, there is a “very material risk” that the government will have to step in to cover a likely shortfall that could amount to 5-10 percent of the island’s gross domestic product. That could, in turn, deepen the island’s debt load.