YEREVAN, January 11. /ARKA/. Moody’s downgraded Cyprus's government bond rating Thursday by three notches from B3 to Caa3, citing the anticipated increase in the government's debt burden, The Economic Times reported referring to the agency’s statement.

The downgrade to middle-range junk bond status was driven by the further increase in the amount of government support that Cypriot banks are likely to require. Cyprus's banks face rising delinquencies on loans to Greek and Cypriot customers.

"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," Moody's said.

It added however that its base case "does not assume a default or distressed exchange in 2013."

Thursday's downgrade is the latest by a major ratings agency of debt-plagued Cyprus, which has stepped up efforts to win a bailout from the European Union.

In total, Moody's has downgraded Cyprus's rating nine notches in the last 10 months, as the European sovereign debt crisis has persisted.

Moody's now estimates that the bank recapitalizations will be about 10 billion euros, which equates to more than 50 per cent of GDP.

That could take Cyprus' ratio of debt to GDP to 150 per cent in 2013, which "would be one of the highest levels in Moody's rating universe," it said.

Moody's said Cyprus could obtain some debt relief through a "large haircut" whereby investors agree to to accept a loss on their bonds.

It also placed Cyprus's debt on "negative" outlook citing liquidity concerns, the bank recapitalization needs and the delay in negotiations with the "troika" of the European Commission, the European Central Bank and the International Monetary Fund on a package of aid to resolve the country's liquidity crunch.

Earlier this week, Cyprus Central Bank governor Panicos Demetriades met eurozone ambassadors to explain reform and restructuring plans for the troubled banking sector.

Eurogroup finance ministers could decide as soon as January 21 on a draft agreement with international lenders for a bailout reportedly totaling 17.5 billion euros ($23.1bn).

Cyprus has already pushed through tough austerity measures to meet the demands of eurozone creditors for more than one billion euros in cuts and savings.—0-