Moody’s ratings agency yesterday downgraded Cyprus’s three main banks over exposure to Greek debt amid fears the state would be unable to bail them out if the need arose.

“The primary driver underlying the rating downgrades of these three banks is the reduced ability of the country to support its large banking system,” said Moody’s statement.

It said the banks’ domestically-owned asset base was equivalent to six times the island’s GDP. Moody’s said a further downgrade of the banks was possible in the future as the financial climate remains unstable.

The international ratings agency downgraded Marfin Popular Bank by three notches to Ba2 and cut Bank of Cyprus and Hellenic Bank by one notch to Ba1.

Moody’s said that out of the three banks, Marfin was the most exposed and in likely need of a state bailout following a Greek haircut of 50 per cent. “Moody’s multi-notch downgrade of Marfin reflects a weakening of the banks’ standalone credit strength, in addition to the above-mentioned reduction in the country’s capacity to provide support,” the agency said.

“Compared to its peers, Marfin’s higher exposures to Greek government bonds (GGBs), at around 91 per cent of Tier 1 capital, render it particularly vulnerable to losses under the revised deal on greater private-sector involvement.”

It estimates that Marfin would require capital of more than €1 billion to meet the central bank’s minimum Core Tier 1 capital requirement of eight per cent and conform with the European Banking Authority’s nine per cent minimum Core Tier 1.

“Given the current difficult market conditions, the task of raising such a substantial amount of capital (equivalent to around five per cent of Cypriot GDP) by June 2012 significantly increases the likelihood that the bank will require a large capital injection from the government,” said Moody’s.