Downgraded Cyprus looks for loan to capitalise Lombard’s main shareholder

Fitch Ratings has downgraded Cyprus's government-debt rating to junk status, and warned of further cuts to come, saying substantial capital injections required by the country's banking sector will push the government to request a euro-zone-funded bailout.

Fitch was the last of the three major credit rating companies to strip Cyprus of an investment-grade rating, limiting market reaction to the decision.

"Fitch judges that the scope for further capital raising (for Cypriot banks) from the private sector is limited and thus assumes that the capital will have to be provided by the government," it said on Monday. Fitch downgraded Cyprus to BB from BBB-.

Fitch said that the fiscal cost of bank support could potentially reach as high as €6 billion, pushing general government debt above 100% of its gross domestic product and leading the government to seek a loan from one of the euro-zone's bailout funds, either the European Financial Stability Facility or the European Stability Mechanism. By comparison, Ireland-another relatively small euro-zone country, and one that was bailed out-had a debt around 108% of its GDP in 2011.

Last week Cypriot Finance Minister Vassos Shiarly said Cyprus Popular Bank, the country's second-biggest bank, would need to be recapitalized by June 30. The country will reportedly also ask for a loan from Russia before requesting aid from its euro-zone partners.

Cyprus Popular (formerly Marfin) is Lombard Bank Malta's major shareholder and is in negotiations with the Cypriot government over possible state financing to help it recapitalise from exposure to Greek toxic debt.

In February the bank had announced a record net loss of €3.3 billion in 2011 after incorporating a 62% "haircut" on toxic Greek bonds.

Lombard Bank's CEO Joe Said has said a Cypriot bailout would not affect Lombard Bank, even though its largest shareholder is most exposed to Greek debt.

But it holds no exposure to non-Maltese securities. "There is nothing to worry about. Lombard is an independent and autonomous bank and there is nothing that could affect Malta or the bank," Said had told The Times.

In a company announcement in February, Lombard had already reassured shareholders that this Cypriot bank was not a majority shareholder in the bank.

Lombard also said it held "no financial exposure whatsoever" to a member of this bank or any other Greek or Cypriot entity. "Lombard holds no exposure to any form of non-Maltese sovereign or corporate securities."

In 2011, Lombard Bank Group - which also operates Maltapost - registered a profit of €7.2 million after tax, and on a bank level, a profit of €6 million after tax.

On the other hand, Cyprus Popular Bank posted a record €2.5 billion loss last year after taking a 76 per cent write-down on its Greek government bond holdings.

The downgrade of Cyprus's sovereign ratings reflects a material increase in the amount of capital Fitch assumes the Cypriot banks will require compared to its previous estimate at the time of the last formal review of Cyprus's sovereign ratings in January 2012. This is principally due to Greek corporate and households exposures of the largest three banks, Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank and to a lesser degree the expected deterioration in their domestic asset quality.