The ratings agency Moody's has slashed the government bond rating of Cyprus by three notches. It said the decision was due to an expected rise in the country's debt burden.
Moody's cut Cyprus from B3 to Caa3 on Thursday, with an added warning that a further downgrade wasn't out of the question.
In a statement Moody's said the country's debt burden was set to rise due to the capital needs for banks hurt by exposure to Greece's financial woes. Banks in Cyprus face rising delinquencies on loans to Greek and Cypriot customers.
"Given that the resulting increase in the debt burden is likely to be unsustainable, Moody's believes there is a significantly increased likelihood that the Cypriot government may eventually default outright or press for a distressed exchange," Moody's said.
It added however that its base case "does not assume a default or distressed exchange in 2013."
It is the ninth time Moody's has downgraded Cyprus in the last ten months. The debt-ridden country is currently seeking financial aid from the European Union and the International Monetary Fund after its banks suffered huge losses on the EU-approved write-down on Greece's debt. The bailout is tipped to reach 17 billion euros ($23.1 billion), almost equivalent to Cyprus' entire economic output.