By Luciana Lopez
NEW YORK Jan 10 Moody's Investors Service
slashed Cyprus's rating three notches on Thursday on an expected
rise in the Mediterranean country's debt burden and warned it
could cut the rating again.
Moody's cut Cyprus to Caa3 with a negative outlook from B3,
saying in a statement the country's debt burden was set to rise
because of capital needs for banks hurt by exposure to
"We think that there's a higher likelihood that the
government may default outright or press for a distressed
exchange," said Sarah Carlson, a senior credit officer with
Moody's sovereign risk group.
That probability is now about 50 percent, she said, although
it is not Moody's base case scenario for 2013.
"We had never published a probability before, I think
because right now we're in the part of the ratings space where
probabilities become quite high," Carlson added.
Last June, the island became the fourth euro zone state to
apply for a financial rescue from the European Union and the
International Monetary Fund after its banks suffered huge losses
on the EU-approved writedown on Greece's debt.
The bailout could reach 17 billion euros, virtually
equivalent to Cyprus' entire economic output.
But a bailout for the country is unlikely to come swiftly,
complicated as it is by worries about debt sustainability.
Nor is Cyprus likely to see an improved sovereign rating as
long as its debt burden remains outsized, Carlson said.
Even after a bailout deal is finalized, the "sheer size" of
the support needed for banks will mean the government's budget
challenge "is unlikely to change materially," she said.
Standard & Poor's rates the country CCC-plus with a negative
outlook. Fitch rates Cyprus BB-minus, also with a negative