Two major banks in Cyprus were downgraded by Moody’s on Tuesday, based on their exposure to Greek debt . The Bank of Cyprus, which is the largest commercial lender, had its rating lowered by one notch to B2 from B1, based on its deposit and senior unsecured debt ratings. Meanwhile another bank, the Hellenic Bank had its deposit ratings cut by one notch to B1 from Ba3.
Both banks were also put on review for a possible further downgrade.
Another bank, the Cyprus Popular Bank, which is the country’s second largest bank, was also put on review for a downgrade.
Cyprus has the third smallest economy in the euro zone but has strong ties with Greece based on the same Greek culture, and thus the close business ties with Greece has put Cyprus economy at risk should Greece exit the euro.
Moody’s commented in an official statement:
“Although a Greek exit is not Moody’s central scenario, the rating agency says that it considers the risk of a euro exit by Greece as substantial and recognizes that the probability of such an outcome may increase further following the Greek parliamentary elections on 17 June.”
There is growing speculation that Cyprus will require an EU bailout in order to shore up its banks exposed to Greek debt, especially the Cyprus Popular Bank. This bank was subjected to a loss of 2.3 billion euros as a result of the 76-percent write-down on its holdings of Greek sovereign bonds. It is in need of recapitalization (1.8 billion euros) as its capital buffers have been depleted.