Cyprus said today it was surprised at the timing of a Moody's downgrade.
But it said it remains focused on steering Greek exposed banks and a recession-hit economy to safety.
Moody's Investors Service cut the credit rating of Cyprus by two notches, citing the nation's close links to Greece and the rising likelihood that Athens will exit the euro zone.
The finance ministry said it "is surprising the current downgrade comes just three days before the Greek elections.''
It also noted it was surprising that it ''came about two weeks before the deadline for completion of the recapitalisation of banks and while the Republic of Cyprus is considering all possible alternative options."
However, the ministry said it "acknowledges the challenges" Cyprus is called on to confront. "The government remains focused on achieving the fiscal commitments, to secure the necessary resources to meet the financial needs of the state and, in cooperation with the central bank, to manage the challenges of the banking system," it added.
Moody's downgraded Cyprus's government bond ratings from Ba1 to Ba3, and placed them on review for further possible downgrade. It said the the key reason for that was the "material increase in the likelihood of a Greek exit from the euro area, and the resulting increase in the likely amount of support that the government may have to extend to Cypriot banks."
It said "this risk is exacerbated by the fact that the country's finances are already strained and access to the international markets is still denied." Those risks have the potential to rise in the aftermath of Greek parliamentary elections on Sunday, Moody's said.
The vote could lead to the country's exit from the euro zone, which would likely spark deep financial turmoil.
Earlier this week, Moody's downgraded two Cyprus banks - Bank of Cyprus and Hellenic Bank - citing their large exposure to a possible Greek euro exit. Cyprus Popular Bank, currently at B3 - lower than the other two - was placed on review for a possible downgrade.
The government is already committed to underwriting a €1.8 billion capital issue for Popular to recapitalise against the Greek debt crisis.
Cyprus has not ruled out an EU bailout to save its banking system but it may instead also seek a loan from either Russia or China instead, a combination of both. Estimates are that Cyprus needs around €4 billion to prop up the banks and help narrow the budget deficit, which widened last year to double the EU ceiling of 3% of GDP.
"It's a fact we are working towards certain directions, having before us various scenarios regarding the issue of recapitalisation of the banks which of course concerns the entire economy," government spokesman Stefanos Stefanou said today.
The central bank governor said yesterday that Cyprus could opt for a foreign loan instead of an EU bailout to deal with its crisis-hit economy if the terms are favourable.
State broadcaster CyBC said discussions to secure another loan from Moscow were "progressing" with Russian educated Cyprus President Demetris Christofias personally involved. Cyprus has already secured a five-year €2.5 billion low-interest loan from Russia to cover its refinancing needs for this year.
