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* Finance ministry says banks robust *
Standard and Poor's cut Cyprus's long-term sovereign rating to A- from A on Wednesday, its second cut in five months, citing spillover concerns on its banking sector from a potential debt restructuring in Greece.
Cyprus ratings could be lowered further if there were an increase in the embedded credit risks in its financial system, either through a further deterioration of credit conditions in Greece or domestically, the agency said in a statement.
"In our view, the increasing likelihood that the Greek government will restructure its debt heightens the risk that a significant portion of the Cypriot government's large financial-sector contingent liabilities will become explicit liabilities migrating to the Cypriot government's balance sheet," Standard & Poor's credit analyst Benjamin Young said.
The move came a day after S&P chopped Greece's debt deeper into junk status, by two notches to BB-. It said that a bailout scheme agreed by euro zone leaders last week increased the likelihood of debt restructuring.
Once seen as spurring growth of Cyprus's banking system, the Greek exposure is now increasingly regarded as an achilles heel for the island's 17.4 bln euro economy.
In a previous assessment, S&P said the Cypriot banking system's exposure to Greek customers and securities of the Greek government and corporations had grown to more than double Cyprus's GDP over the past decade.
On Wednesday, it said the Cyprus ratings could stabilise at present levels if the Cypriot banking sector showed strong resilience, and further strengthened its capital levels. That must be sufficient to support its Greek exposure without resorting to government resources, the agency said.
ROBUST
The Cypriot finance ministry said in reaction to the decision that its banking sector was robust and placed the onus on the central bank as responsible for supervision of the industry.
"The government maintains that the banking sector is robust," Finance Minister Charilaos Stavrakis said. "An increase in capital inflows from abroad over the past 12 months is a vote of confidence in the banking system."
Cypriot banks exposure to Greece has been cited as a concern by other ratings agencies. Moody's in February cut Cyprus to A2, while Fitch, the only agency not to make a move so far, has placed Cyprus's A rating on credit watch negative.
The Central Bank has said it plans to build a financial stability fund, worth around 500 mln, to backstop banks in the event of trouble. In a recent report, Moody's said it estimated the banking sector needed some 2.7 bln euros to restore core Tier 1 capital if scenarios in their own stress tests materialised.
