Standard and Poor's slashed Cyprus' credit rating Thursday by two notches to CCC+, saying the eurozone member was facing increasing financial pressure, with bailout negotiations still unfinished.
"With the government's financing options increasingly limited -- coupled with what we view as the hesitant attitude of Cyprus' eurozone partners toward sharing the cost of a severe banking crisis -- we view the risk of a sovereign debt default as considerable and rising," the ratings agency said.
The S&P downgrade puts Cyprus even further into junk territory. It also issued a negative outlook.
"The downgrade reflects our view that Cyprus' creditworthiness has deteriorated further since the last downgrade on Oct. 17, 2012, as financing pressures have intensified and uncertainty about the terms of any official support persists ahead of the February 2013 presidential elections," it said.
The agency acknowledged that while Cyprus' bailout talks with the International Monetary Fund, the European Union and the European Central Bank had been slow, some progress had been made.
It also welcomed "far-reaching spending cuts" included in the government's 2013 budget proposal, but warned: "We believe the budget's underlying revenue assumptions may be too optimistic."
S&P said the negative outlook indicated that another downgrade was possible, should "external and fiscal financing pressures escalate."
"We see at least a one-in-three chance that we could lower the ratings again in 2013," the agency said, adding that the rating could stabilize if a bailout deal was "quickly agreed".
On Thursday, the IMF said bailout talks with Cyprus, which currently holds the European Union's rotating presidency, were not expected to wrap up this year.
Nicosia requested a bailout in June when its two largest Greek-exposed banks asked for assistance after failing to meet EU capital buffer criteria.
The money needed by Cyprus has been widely reported to total 17.5 billion euros ($23.1 billion) -- 10 billion euros for the banks, 6.0 billion euros for maturing state debt and 1.5 billion euros for public finances.
On Monday, a finance ministry official warned that Cyprus could default on loan payments due this month unless it can reach an agreement on a bailout within days.
The country's entire GDP in 2011 was 17.97 billion euros and, according to 2013 budget projections, it is expected to shrink 2.4 percent this year.