Cyprus has taken measures to cooperate with the Central Bank for shielding the island's banking system against possible Greek economic fallout, the Finance Ministry said on Saturday.
The ministry's statement came after Moody's rating agency downgraded Cyprus's government bonds ratings by two notches to Baa3 from Baa1 on Friday.
The rating agency has also downgraded Cyprus's short-term rating to Prime-3 from Prime-2 and placed it on review for further possible downgrade.
The ministry cited two bills pending in parliament providing for the creation of a Financial Stability Fund and empowering the government to intervene in bank recapitalization in case of a bank being unable to cope on its own.
The European Banking Authority had estimated that the Cypriot banks exposed to Greek sovereign debt will require a capital buffer worth of 3.6 billion euros (4.9 billion U.S. dollars), in order to increase their core tier 1 ratio to 9 percent.
Cyprus's two largest lenders, the Cyprus Bank and the Marfin Popular Bank, have announced that they could recapitalize by their own means.
The Finance Ministry statement renewed a call to political parties "to approve the 2012 state budget along with the proposed fiscal measures as a necessary step towards fiscal consolidation."
In putting the Cypriot sovereign credit to just one notch above non investment speculative grade and keeping a watch for further downgrade, Moody's said its move was driven by the high likelihood that the Cypriot banking system will require state support in 2012 as a result of the large expected write-downs on its exposures to Greek government bonds.
"This state support will have a significant negative impact on the government's debt metrics," Moody's said.
Moody's announcement came shortly after the Cypriot opposition parties pushed through parliament a non-binding resolution calling on President Demetris Christofias to resign over a massive munition blast in July.
In October, Standard and Poor's rating agency downgraded Cyprus from BBB+ to BBB, citing the Cypriot banking system's exposure to Greek debt.