NEW YORK – Fitch put Cyprus on rating watch negative on Tuesday, saying the shock from the country's banking system could damage the domestic economy and public finances.
The agency currently rates Cyprus B, a speculative rating.
A painful European rescue plan for the tiny island member of the euro zone has roiled financial markets this week, with large bank depositors penalized as part of the program.
As part of its bailout deal, Cyprus agreed to fold small deposits of Cyprus Popular Bank, also known as Laiki, into Bank of Cyprus. Laiki will be shuttered under the terms of a 10 billion euro ($13 billion) rescue package agreed on Monday in Brussels with international lenders to avert a financial meltdown on the Mediterranean island.
"Fitch will seek to resolve the RWN once further key details of the program have been agreed and made public," the rating agency said in a statement.
Rival rating agency Standard & Poor's cut Cyprus' long-term foreign currency credit rating to CCC from CCC-plus last week. Moody's Investors Service rates Cyprus Caa3. Both those ratings are well into junk territory.
Accounts above 100,000 euros in both banks, which are not guaranteed by the state under EU law, will be frozen and used to resolve Laiki's debts and recapitalize the Bank of Cyprus by converting deposits into shares.
Banks are due to reopen in Cyprus on Thursday after a closure of nearly two weeks, but withdrawals will be limited "for a matter of weeks", the nation's finance minister has said. The government has yet to spell out restrictions on capital movements and there are fears of a bank run.
(Reporting by Hilary Russ and Luciana Lopez; Editing by Chizu Nomiyama)