Ratings agency Moody’s yesterday downgraded its Cyprus government bond rating by two notches to A2 from Aa3, citing the eurozone member’s weakening medium-term credit fundamentals.

“At A2, the rating outlook is stable. Today’s rating action concludes the review for possible downgrade,” the ratings agency said in a statement, ruling out the possibility of any other further ratings decrease in the near term.

Moody’s decision came as little surprise as it had placed Cyprus under surveillance last month.

Moody’s has focused its attention on the exposure of the island’s oversized banking sector to Greece, which came close to insolvency at the beginning of last year, threatening the 16-nation eurozone bloc.

In response, the Cypriot finance ministry last month said the government had no plans to borrow on the international market as it has already covered its financial needs over the coming months securing competitive rates.

The Cyprus government has cut spending and increased taxes to bring its deficit to below 4.5 per cent of GDP this year as required by the European Union on the way to getting it down to three per cent in 2012.

In its analysis, Moody’s also cited concerns over the country’s competitiveness.

“Public-sector wages and social transfers account for two thirds of state spending and, in the absence of structural reforms to these areas, Moody’s estimates that longer-term deficit and debt reduction will be very difficult to achieve,” the ratings agency said.

On the banking sector it stressed that “Cypriot banks’ exposure to macroeconomic stress in Greece is substantial, and prolonged macroeconomic stress increases the probability that these contingent liabilities will crystallise” on the sovereign debt’s balance sheet.