27th July 2011
This is the latest sign the island nation may become the fourth eurozone country heading towards a multibillion-euro bail-out, reports the Financial Times (paywall).
The announcement, which moved the sovereign bonds from A2 to Baa1 and put them on a negative outlook, cited the economic impact of the recent explosion at the island's main power plant and the "increasingly fractious" political climate in the wake of the blast, which has led to ministerial resignations and halted government austerity plans.
"Cypriot banks remain heavily exposed to macroeconomic stress and Greek government bonds," Moody's said.
"A period of prolonged macroeconomic stress would increase the likelihood that these contingent liabilities will crystallise on the Cypriot government's balance sheet."
Bank stress tests conducted by the European Banking Authority showed that Cypriot banks are among the largest holders of Greek bonds in the entire eurozone. Bank of Cyprus holds €2.4bn in Greek debt and Marfin Popular Bank holds €3.4bn.
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