Cyprus’s credit rating has been cut to junk status by Fitch over fears the country could require a eurozone bailout for its troubled banks.
“Fitch judges that the scope for further capital raising (for Cypriot banks) from the private sector is limited and thus assumes that the capital will have to be provided by the government,” it said.
Fitch downgraded Cyprus to BB+ from BBB-, becoming the last of the three major credit rating companies to strip Cyprus of an investment-grade rating.
Cyprus, whose banks are heavily exposed to Greece, will need EUR 4 B to support its banks, said Fitch.
Cyprus Popular Bank took heavy losses on its holdings of Greek debt in the debt restructuring in March, and now needs an estimated EUR 1.8 B to be restored to health.
Fitch said the downgrade was mainly due to the exposure of its three largest banks – Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank – to Greece.
“Even assuming that Greece remains in the eurozone, Cypriot banks will have to bear significant further loan losses as the Greek economy continues to contract over the medium term as well as the deterioration in domestic asset quality,” it said.
Fitch also warned that further downgrades were possible if the situation in Greece deteriorated further.
Fitch’s move follows that of other major rating agencies Moody’s and Standard & Poor’s which have already cut Cyprus’ credit rating to junk.