S&P cuts Cyprus long-term credit rating to BBB

Standard & Poor's cut Cyprus' long-term credit rating by a notch to BBB on Thursday, citing the Cypriot banking system's exposure to sovereign Greek debt.

European Union leaders earlier Thursday struck a deal in which banks would take a 50% loss on their holdings of Greek government debt as part of a broad Greek restructuring.

That was above an earlier agreement in July that involved a 21% haircut.

“We believe that a Greek default scenario with private sector involvement, or 'haircuts,' higher than previously agreed by commercial creditors would necessitate the recapitalization of some domestic banking institutions,” in Cyprus, S&P said.

S&P said the Cyprus' long-term credit rating remained on credit watch negative. It also cut the country's short-term rating to A-3 from A-2 but removed it from negative watch.

The two commercial banks, Bank of Cyprus and Marfin Popular Bank, said on Thursday that they would be able to withstand further banking stress tests through ongoing capital raising or fresh bond issues.

Cyprus Finance Minister Kikis Kazamias declared that the island's banks were financially sound and would not need a state fund bailout, but was critical of the rating agencies' continued downgrades.

Moody's and Fitch are also expected to issue similar downgrades, albeit only of a notch, with bank rating downgrades to follow in about a week's time.