Business

Cyprus credit rating cut by Fitch on Greek debt fears

Two men walk past a Bank of Cyprus branch in Nicosia, Cyprus.
Image caption Cypriot banks are exposed to Greek debt

Cyprus has had its credit rating cut by rating agency Fitch because of worries over how the country will be affected by the Greek debt crisis.

Fitch cut Cyprus's rating to A- from AA- on concerns that its banks may face losses on the money they lent to Greece.

Credit ratings indicate how safe it is to lend money to a company or country.

The new rating is not expected to stop Cyprus borrowing money, but it may make it more expensive to do so in future.

The move comes as the eurozone continues to negotiate a new bail-out package for Greece to avoid it defaulting on its debts.

Much of the money Greece owes was lent by European banks, including banks in Cyprus.

The downgrade is the result of concerns that this money will now not be paid back in full, even if there is a further bail-out.

About one-third of the assets of banks based in Cyprus, including those of Greek subsidiaries on the island, are linked to Greece, according to Fitch.

"The downgrade reflects the severity of the crisis in neighbouring Greece and the risk this poses for the Cypriot banking system and consequently the public finances of Cyprus," said Chris Pryce, director in Fitch's Sovereign Group.

Despite the downgrade, Fitch said that Cypriot banks remained "relatively well placed" to absorb losses on their Greek debt.

The move was based on an assessment of the cost of recapitalising Cypriot banks for any losses on Greek debt.

Fitch claim that if Greece fails to pay back half its debt this will cost the banks 2bn euros ($2.86bn, £1.74bn), which may need to be met by the state.

However, if losses were worse, Fitch said, then it may put strains on the country's finances.

Cyprus, one of the smallest countries in the eurozone, is also attempting to cut its public deficit.

There are two other credit ratings agencies, Moody's and Standard & Poor's.

Earlier in May, Moody's warned that Cyprus may face a downgrade, whilst Standard & Poor's has cut Cyprus's credit rating twice since November.

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