UPDATE 1-Fitch cuts Cyprus sovereign rating to B citing banking sector

Fri Jan 25, 2013 2:40pm EST

By Daniel Bases

NEW YORK Jan 25 (Reuters) - Fitch Ratings on Friday cut euro zone member Cyprus's sovereign credit rating to B from BB-minus, a two-notch downgrade, saying the government probably will have to put more financial support behind the ailing banking sector.

"Uncertainty regarding the capital needs of the cooperative banks remains. Including the latter, the total recapitalization costs of the banking sector could be up to 10 billion euros, although Fitch anticipates that this figure may include a degree of headroom," Fitch said in a statement.

The credit outlook on the government remains negative. Fitch said this is a reflection of "continued policy uncertainty" over a financial bailout package being prepared with the euro zone. A March decision on the bailout is possible, outgoing Eurogroup President Jean-Claude Juncker said on Monday.

Cyprus is rated CCC-plus with a negative outlook by Standard & Poor's and Caa3 with a negative outlook by Moody's Investors Service.

Cyprus applied for financial aid in June, the fourth euro zone state to seek assistance, after its banks suffered huge losses following an European Union-approved writedown of Greek debt. Some states have been uneasy about bailing out a country they say lacks financial transparency.

Preliminary estimates of a draft bailout deal put the bill at 10 billion euros for bank support. On that basis, its total bailout, including fiscal needs, could reach 17-17.5 billion euros, equivalent to the island's annual economic output.

"In this scenario Fitch forecasts that government debt to GDP would jump to over 140 percent in 2013. This is significantly higher than Fitch's previous estimate of peak debt of 120 percent of GDP and materially lowers the creditworthiness of the sovereign," Fitch said in its statement.

"Fitch's estimates of the potential losses and capital needs of Cypriot banks are sensitive to various assumptions, which are subject to change as the situation unfolds," Fitch said.

The ratings agency said it believes an official financing program will be put in place before June 3 when a 1.4 billion euro bond redemption is due.

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