Fitch cut Cyprus' government bond rating by two notches on Friday to 'B' with a negative outlook, saying the cost of bailing out banks is likely to be higher than previously thought.
While Fitch believes the eurozone country will eventually agree a bailout deal with the EU and IMF, it said uncertainty over bank recapitalisation and the depth and duration of the recession increased uncertainty over Cyprus getting to grips with its public finances.
Fitch said it now estimates the cost of bailing out all of Cyprus's banks at 10 billion euros ($13.5 bn), which would mean the country needs a bailout package of roughly 17 billion euros.
This would push up Cyprus debt to 140 percent of gross domestic product this year, Fitch calculates.
"This is significantly higher than Fitch's previous estimate of peak debt of 120 percent of GDP and materially lowers the creditworthiness of the sovereign," said the ratings agency.
The "B" rating signifies that country's bond's are undesirable investments which may have only a small assurance of interest and principal payments.
The Fitch downgrade follows recent similar cuts by the other two main agencies, Moody's and Standard & Poor's, which both put Cyprus in the category of bonds vulnerable to default.
Cyprus has been seeking a bailout from the European Union and International Monetary Fund since June.
The amount is expected to reach 17.5 billion euros, but disagreements over conditions attached to the aid have prompted the EU to postpone a deal until after a presidential election next month.
Germany has also cast doubt over the bailout, criticising Cypriot banks as being havens for tax evaders and money launderers.