Cyprus Cut Three Steps to Caa3 by Moody’s on Bank-Bailout Costs

Cyprus’s credit rating was cut three steps to Caa3 by Moody’s Investors Service, citing the government’s projected increased debt load from the need to recapitalize its banking system.

Nonperforming loans at the nation’s three largest banks rose to 26 percent in September from 19 percent in March, New York-based Moody’s said today in a statement. Recapitalizing those institutions may cost of about 10 billion euros ($13.3 billion), Moody’s said.

“As a result of the increased debt burden, we think there’s a higher likelihood that the Cypriot government may default outright or press for a distressed exchange,” Sarah Carlson, a senior credit officer at Moody’s in London, said in a telephone interview. “It’s important to note that our base-case scenario does not assume that this will happen in 2013.”

Cyprus’s debt to gross-domestic-product ratio may rise to 150 percent this year, Moody’s said. The rating company’s negative outlook reflects “uncertainty” around the finalization of the memorandum of understanding between the European Union, European Central Bank and International Monetary Fund, known as the troika, with Cyprus.

“It’s fair to say that our base-case assumption is that this MOU will be finalized, that the funds will be dispersed, that Cyprus will receive assistance until at least 2016,” Carlson said. “But there is still this lingering uncertainty about this whole process.”

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