Fitch cut to single-B territory the ratings of Bank of Cyprus and Cyprus Popular Bank covered bond programmes on Friday after having in late January downgraded Cyprus’s sovereign rating and the issuers’ ratings.

Bank of Cyprus (BoC) and Cyprus Popular Bank (CPB) covered bonds backed by Greek mortgages were downgraded from BB- to B. BoC and CPB programmes backed by Cypriot mortgages were cut from BB to B+.

Fitch said that a Greece country ceiling of B- applies to programmes secured by Greek assets, and that Greek-backed covered bonds issued by BoC and CPB have therefore been cut to the banks’ issuer default ratings (B), which provide a floor for the covered bond ratings.

The programmes backed by Cypriot assets benefit from one notch of uplift above the issuer ratings, said Fitch, because the overcollateralisation of their cover pools – which under Cypriot covered bond law is a minimum of 5% – is consistent with Fitch’s 5% breakeven OC for each programme at the B+ rating level.

The rating actions came after Fitch downgraded Cyprus’s long term foreign and local currency issuer default ratings from BB- to B on 25 January. The rating agency said that new estimates indicate that costs to recapitalise Cypriot banks could be up to Eu10bn, increasing the size of a government support programme to more than Eu17bn.

“In this scenario Fitch forecasts that government debt to GDP would jump to over 140% in 2013,” said the rating agency. “This is significantly higher than Fitch’s previous estimate of peak debt of 120% of GDP and materially lowers the creditworthiness of the sovereign.”

As a result of the sovereign downgrade, Fitch cut covered bond issuers BoC and CPB from BB- to B on 31 January.

“Fitch currently considers sovereign and bank risks as being closely interconnected in Cyprus,” said the rating agency.