“Given that the resulting increase in the debt burden is likely to be unsustainable, Moody’s believes there is a significantly increased likelihood that the Cypriot government may eventually default outright or press for a distressed exchange,” the agency said in a statement.
Moody’s also warned that more downgrades are possible for the country that is trying to finalize a bailout with international lenders to rescue its banks, which suffered huge losses on the EU-approved write-down on Greece’s debt.
Last month, Standard & Poor’s downgraded Cyprus’ credit rating by two notches to CCC+ over similar fears that it could default on its debts.
European countries plunged into a financial crisis in 2008, forcing EU governments to adopt tough economic reforms to cap their worsening debt crises. The measures have sparked many angry protests across the continent.