Moody's downgraded Friday the credit ratings of Cyprus's top three banks to Caa3 as the country was considering bank account levies to secure an international bailout and avoid a collapse of its financial sector.
Moody's Investors Service said the lowering of ratings for Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank was due to expectations depositors would suffer losses, the risk capital controls would be imposed and uncertainty regarding their recapitalisation plans.
Moody's now rates the standalone credit strength of all three banks as Ca, or highly vulnerable to default.
"The situation in Cyprus remains very fluid and the risk of significant losses has increased, as has the risk of a bank liquidation scenario," said Moody's.
The Cypriot government is currently working on a new plan to raise some seven billion euros ($9 billion) in order to unlock 10 billion euros in bailout assistance from the EU and IMF.
There has been speculation that the government could close Popular Bank to lower the cost of recapitalising the banks.
The European Central Bank has warned it will cut of emergency assistance to Cypriot banks unless the country agrees on a bailout plan by Monday.
The Caa3 rating, which is under review for further downgrade, is in line with Moody's rating for the Cypriot state.