Moody was prompted to downgrade the country as it had particularly noted that the Cypriot government had passed a large-scale fiscal consolidation programme, which contains a greater number of structural changes to public-sector expenditure than had been anticipated.

The international ratings agency reduced Cyprus’s rating by one notch to Ba1 and also assigned a negative outlook to the country.

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Moody’s remarked that apart from exposure to Greek government bold holdings, the banks of Cyprus are also suffering from large Greek loan portfolios.

Additionally, weak private sector confidence and adverse external conditions have contributed towards the woes of Cyprus, limiting the nation’s growth potential in the next few years and the government facing fiscal challenges.

The agency said that the scale of the downgrade was limited in light of the government’s move to curb public spending and the discovery of substantial natural gas deposits off the island’s shores.

The downgrading has prompted Cyprus to seek US$3.3 billion low-interest loan from Russia to meet its financing needs for 2012.

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Moody opines that although Russian loan may help Cyprus get by in 2012, there is uncertainty over how the government will secure EUR2 billion to meet its financing needs for 2013.

Meanwhile, the government is hopeful that the current austerity measures will shrink the deficit to around 3% of Cyprus’ GDP and that the gas discovery in the Cypriot Exclusive Economic Zone of the Levant Basin would support the country’s finances in the long-term.

In January, Standard & Poor’s had also downgraded Cyprus’s credit rating to junk status, whereas Fitch rates Cyprus just a notch above junk.