Moody's raised European Union member Cyprus' Caa3 government bond rating outlook from "negative" to "positive," the agency said on Friday. The Mediterranean island country has taken important steps to slash its deficit and implement new fiscal consolidation measures. The general government deficit was 5.4 percent of GPD in 2013, down from 6.4 percent a year before, Moody's said.

The island nation has also been fulfilling its obligations to international lenders, Moody's added - a sign of increased confidence for further support. Cyprus received a 10 billion euro ($13 billion) troika bailout package last year in return for closing the country's second-largest bank, Laiki, and setting up a one-time tax on bank deposits of at least 100,000 euros in its largest lender, Bank of Cyprus.

Moody's cautioned that the Caa3 rating reflects the "still-elevated risk of Cyprus defaulting on its debt, or undergoing debt restricting over the medium term given the highly interrelated economic, banking sector and public finance risks it continues to face."

"While Moody's acknowledges that the government has exhibited the financial flexibility to consolidate public finances, these measures are on a much smaller scale than the risks posed by potential protracted economic recession," the agency said.

dr/lw (Reuters, dpa)