Spain and Cyprus ratings cut by Moody's

Man draped in Spanish flag withdraws cash from an ATM Spain has just agreed a 100bn-euro rescue of its banks with its eurozone partners

The credit ratings of Spain and Cyprus have been cut by rating agency Moody's.

The move follows a 100bn-euro ($126bn; £81bn) bailout of Spain's banks by fellow eurozone countries agreed over the weekend. Cyprus is expected to seek its own bailout in the coming days.

Spain's government faces its highest borrowing costs in debt markets since joining the euro, as lenders fear for the country's future in the eurozone.

Spain's rating was cut three notches, from A3 to Baa3 - one notch above junk.

Cyprus' rating fell two notches, from Ba1 to Ba3, pushing it deeper into junk status.

Grexit

Moody's said the ratings may be downgraded again after it concludes a review of Spain's creditworthiness within the next three months.

Many investors are restricted from investing in debts that are given a junk rating, implying that any further downgrade is likely to make it even harder for Spain to borrow.

Moody's has previously indicated that it will consider cutting the credit ratings of all eurozone governments - including top AAA-rated Germany - if it believes there is a material increase in the risk that Greece may be forced out of the eurozone.

One factor likely to bring the eurozone closer to a "Grexit" - as it has been dubbed by markets - would be a win by the anti-austerity radical left-wing Syriza party at new Greek parliament elections due on Sunday.

Banks

Moody's said it had decided to cut Spain's rating due to the weakness of the Spanish economy, the government's difficulties in borrowing from financial markets, and the 100bn euros in additional debts to be taken on by Spain in order to prop up its banks.

The Spanish banks face potentially huge losses on loans they made to construction companies and mortgage borrowers during a property bubble in the last decade that has now burst.

The banks are undergoing two independent audits to determine how much more capital must be injected into them to absorb potential future losses.

The bailout agreed at the weekend would leave Spain's government sitting on the risk of any such losses.

It is also thought that the bailout will do little to help Spain's existing private-sector lenders, as the rescue loans are likely to be given priority if Spain has to renege on its debts in the future.

Markets have continued to react negatively to the rescue. On Thursday, Spain's 10-year implied cost of borrowing in the bond markets ended the day at an annual interest rate of 6.75%, close to a euro-era high set on Tuesday.

Meanwhile Cyprus is expected to seek a bailout of up to 5bn euros, or a quarter of its GDP, in order to finance a rescue of its own banks.

The Cypriot banks are heavily exposed to the troubled Greek banking system.

However, it is unclear whether the Cypriot government will seek a loan from its European partners, or will instead turn to Russia, who already provided it with a 2.5bn-euro loan in December.

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