Covered bonds issued by Marfin Popular Bank were downgraded and those of Bank of Cyprus put on review for downgrade by Moody’s today (Monday) following a downgrade of Cyprus. Four Greek covered bond programmes were placed on review for downgrade by the rating agency on Friday because of an increased risk of a disorderly default by the sovereign.

Cypriot issuer Marfin Popular Bank had its covered bonds backed by Cypriot residential mortgage loans and its covered bonds backed by Greek residential mortgage loans downgraded from Baa3 to Ba3. Covered bonds issued by Bank of Cyprus, and backed by Greek residential mortgage loans, rated Baa3, were placed on review for downgrade.

Moody’s on 4 November downgraded Cyprus’s rating by two notches to Baa3, on review for further downgrade.

A downgrade of the respective issuers’ senior unsecured ratings on 8 November also affected the covered bonds through Moody’s Timely Payment Indicator (TPI) framework. Moody’s downgraded Marfin’s senior unsecured rating by three notches to B2, on review for further downgrade, and Bank of Cyprus’s senior unsecured rating by one notch, to Ba2, on review for further downgrade.

The TPI of the three covered bond programmes is “very improbable”. The TPI leeway of all programmes is one notch, meaning the covered bonds might be downgraded if the issuer is downgraded more than one notch, all other variables being equal.

Moody’s said on Friday it expects that the increased risk of default in Greece would increase the likelihood of high severity events that would have a material impact on both credit and market risk on the covered bonds issued by Greek banks.

The rating action included reviews for downgrade of covered bonds issued by Alpha Bank (covered bonds rated Ba3), National Bank of Greece programmes I and II (Ba3), and mortgage covered bonds issued by EFG Eurobank Ergasias programme I (Ba3) and programme II (B1).

Timely payment indicators (TPIs) are “improbable” for Alpha, EFG CB I, EFG CB II and NBG II, and “very improbable” for NBG CB I. Greek covered bonds cannot be rated higher than Ba3, which represents the lowest point in the TPI table, because of the sovereign rating of Ca.

Minimum overcollateralisation levels for the programmes are: 15% for Alpha, 17.8% for EFG CB I, 42% for EFG CB II, 88.7% for NBG CB I, and 19% for NBG CB II.

“The events in Greece heightened uncertainty around the implementation of the country’s economic and fiscal reform programme,” said the rating agency, “which is a precondition of the European Union (EU) rescue package approved on 27 October.”

It said even if a coalition government were to approve the EU rescue package, the outcome of elections likely to take place in 2012 is uncertain.

“Uncertainty around the ability of Greece to then implement the economic and fiscal reforms that are required under the rescue package,” continued Moody’s, “and therefore to continue to obtain the financial funding which is conditional upon implementation of these reforms, has risen still further.”

The risk of disorderly default has risen because of a possible temporary disruption of the domestic banking system or government services, and political and social instability.

Moody’s review will examine the implications of a default scenario on the covered bonds, as well as the likelihood of a scenario where Greece exits the euro.