By Daniel Bases
NEW YORK Jan 25 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
"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
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.