shielding the island's banking system against possible Greek economic
fallout, the Finance Ministry said on Saturday.
The ministry's statement came after Moody's rating agency downgraded
Cyprus's government bonds ratings by two notches to Baa3 from Baa1 on
Friday.
The rating agency has also downgraded Cyprus's short-term rating to
Prime-3 from Prime-2 and placed it on review for further possible
downgrade.
The ministry cited two bills pending in parliament providing for the
creation of a Financial Stability Fund and empowering the government
to intervene in bank recapitalization in case of a bank being unable
to cope on its own.
The European Banking Authority had estimated that the Cypriot banks
exposed to Greek sovereign debt will require a capital buffer worth of
3.6 billion euros (4.9 billion U.S. dollars), in order to increase
their core tier 1 ratio to 9 percent.
Cyprus's two largest lenders, the Cyprus Bank and the Marfin Popular
Bank, have announced that they could recapitalize by their own means.
The Finance Ministry statement renewed a call to political parties "to
approve the 2012 state budget along with the proposed fiscal measures
as a necessary step towards fiscal consolidation."
In putting the Cypriot sovereign credit to just one notch above
non-investment speculative grade and keeping a watch for further
downgrade, Moody's said its move was driven by the high likelihood
that the Cypriot banking system will require state support in 2012 as
a result of the large expected write-downs on its exposures to Greek
government bonds.
"This state support will have a significant negative impact on the
government's debt metrics," Moody's said.
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