Moody's cuts Cyprus's government bond ratings to B3 from Ba3

NEW YORK Mon Oct 8, 2012 5:23pm EDT

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NEW YORK Oct 8 (Reuters) - Moody's Investors Service on Monday slashed Cyprus's government bond ratings three notches to B3 from Ba3, citing the country's weakened banks as a key driver in the downgrade.

Deteriorating conditions in Greece and Cyprus are causing "profound difficulties" in the banking sector, Moody's said in a statement.

"In order to maintain appropriate domestic bank capital levels, the Cypriot government will likely need to provide financial support to the country's banks that could threaten the sustainability of the government's debt burden," the statement noted.

"The banking sector's difficulties will reduce domestic credit growth and severely constrain the country's growth potential, which will exacerbate existing economic and institutional weaknesses," Moody's said.

Cyprus sought aid from the European Union and the International Monetary Fund in June after its two largest banks took overwhelming losses on their lending to Greece and turned to the state for financial support.

The island, one of the smallest members in the 17-nation euro zone, has been unable to borrow from international markets for more than a year because of the high borrowing costs implied by yields on its traded debt.

The rating carries a negative outlook.

Standard & Poor's rates the country BB; Fitch rates the country BB-plus.

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