Ratings agency Standard and Poor's on Wednesday slashed the long-term credit rating of Cyprus by three notches to "B", citing the government's failure in sealing a bailout deal with international lenders to rescue its Greece-exposed economy.
"The downgrade reflects our view that Cyprus' creditworthiness has deteriorated since the last downgrade on August 2, 2012, as the government has not yet negotiated a support package, while external and fiscal risks have risen," the agency said in a statement.
"We believe that electoral considerations ahead of the presidential poll, scheduled for February of 2013, have contributed to policy inertia," the agency added.
Wednesday's downgrade from "BB" to "B" also followed a decision by another rating agency, Moody's, earlier this month to cut the debt ratings for Cyprus and three Cypriot banks, saying that it expected the government to have to rescue the troubled banks with outside support.
In its statement, S&P also referred to the "severe banking crisis, partly triggered by Cypriot banks' involvement in Greek debt restructuring in early 2012 (private sector involvement) but made worse by the deterioration in banks' domestic lending books, and the government's fiscal inaction."
The agency added that the rating remained on CreditWatch with negative implications, suggesting that it could soon be downgraded even further.
"We see at least a one-in-two chance that we could lower the rating again if official assistance is not forthcoming.
"We could also lower the ratings if we believe the government is not able to fulfill the conditions of a troika programme," the agency said, referring to international lenders -- the European Union, the European Central Bank and the International Monetary Fund.
European Commission President Jose Manuel Barroso urged Cyprus last week to swiftly reach an agreement on the terms of a bailout deal with the international lenders to save the island's Greece-exposed economy.
On Wednesday, Cyprus Finance Minister Vassos Shiarly said the troika of lenders was expected on the island next week to discuss the terms of the bailout, with a view to sealing a deal to put to the Eurogroup on November 12.
S&P said it expected the government to reach an agreement with the troika, one that could potentially include a Russian contribution to the bailout.
The agency also revised its estimate of the island's annual GDP per capita growth, lowering it to around negative two percent on average for 2012-2014. The agency expects Cyprus' public debt to reach 130 percent of GDP by the end of next year.
Based on the agency's notation, Cyprus is just two notches away from the "C" grades, which convey that there is at least a real risk that it could default on debt.
